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Wednesday, June 24, 2015

Mitrajaya Holdings Bhd - Superb Earnings Prospect

Initiating coverage on Mitrajaya Holdings Bhd (MITRA) with an OUTPERFORM rating and Target Price (TP) of RM2.35. We reckon that this under-researched stock is one of the good quality small-mid cap stocks with strong earnings growth visibility and compelling prospects. Key investment merits include: (i) superb potential earnings growth in the near-medium-term backed by record high orderbook achieved early this year, (ii) targeting to sustain the record-high orderbook by replenishing another RM1.0b new contracts this year, (iii) margin that is above industry average, (iv) being one of the potential beneficiaries of 11MP, (v) property division supported by strategic location of land (next to LRT stations), (vi) strong balance sheet with net gearing of 0.2x vs industry’s net gearing of 0.5x. Interestingly, despite the strong fundamentals, the stock is still trading at single digit PER valuation, i.e. Fwd-PER of 7.4x. This is relatively cheaper than that of small-mid cap contractors’ Fwd-PER range of 10-14x. Our TP of RM2.35 implies 9.4x PER that offers potential upside of 26.3%

Superb potential earnings growth. While we expect the group to approach the RM1.0b revenue mark in FY16, we forecast for MITRA’s earnings to grow by 47%-27% in FY15E-FY16E driven mainly by the group’s record high orderbook of RM1.9b achieved early this year coupled with sustainable margins.

Targeting to secure RM1.0b new jobs this year. YTD, MITRA has replenished RM230m worth of new contracts and management is targeting to secure another RM770m before the end of the year, to make up its total target of RM1.0b. Conservatively, we only forecast the group to secure RM700.0m this year. Hence, there could be further upside potential to our current earnings estimates.

Above-average construction margins. MITRA has consistently achieved pre-tax margins that are above industry average in its construction division. In FY14, MITRA delivered 9.8% PBT margin for its construction division, higher than that of sector’s PBT margin of 7.9%. The group is able to fetch higher margins as the group adopts value engineering and design while some projects are secured with good pricing.

To benefit from 11MP announcement. Among the key projects under 11MP that MITRA can participate are: (i) LRT3, and (ii) development of 606.0k affordable houses. We believe MITRA stands a good chance of securing those projects due to its track record. MITRA is currently building LRT extension stations. The group also has been building affordable houses for the government in Putrajaya. Latest project that it secured was earlier this year where it was appointed the main contractor to build RM230.0m PPA1M public apartments in Putrajaya.

Property division to be supported by strategic property location. We like the fact that MITRA’s property project in Wangsa 9 (Phase 1) achieved 70% take-up rate despite the challenging property market environment. We believe this is due to the strategic location of the land which is adjacent to a LRT station. Other than this, MITRA has another piece of land (15 acres) in Puchong Prima, which is also adjacent to an upcoming LRT station. Total GDV stands at RM1.5b which consist of mixed development project that going to be linked to the LRT station.

Strong balance sheet. The group’s net gearing ratio stood at 0.2x. This is relatively lower than that of the construction average net gearing of 0.5x. Strong balance sheet provides more room to gear up to invest for future growth.

Still trading at single digit valuation despite the strong fundamentals. Despite the solid investment merits, the stock is still trading at Fwd-PER of only 7.4x. This is relatively cheaper than small-mid cap contractors PER range of 10-14x. If the stock trade at 10.0x Fwd-PER, the stock’s market cap will be as high as RM1.1b on par with HSL, MUHIBAH, WCT and upcoming IPO SunCon.
Source: Kenanga Research - 24 Jun 2015

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