M&A plans could serve as key catalyst
? EITA’s 1H9/22 core net profit made up 43% of our FY9/22F forecast. We
expect its earnings to pick up in the next quarters with more business.
? The group said in a recent media interview that it is looking to bring its highly
cash-generative maintenance business to a neighbouring country.
? Although EITA remains an Add, we cut our TP to 93 sen on the back of high
input cost risks possibly plaguing its margins.
1HFY9/22 core net profit in line with our expectation
After removing RM105,000 worth of fixed assets’ disposal gains, EITA Resources’s
1HFY9/22 core net profit came in at RM11m (+8.9% yoy). However, the group’s
1HFY9/22 revenue yoy growth rate was much bigger, at 39.9%. The discrepancy
between the topline and bottomline yoy growth rates was partially due to the pre-tax loss
in its manufacturing division, which had fewer lift projects in 2QFY9/22 and higher
administrative costs. Going further down the income statement lines, EITA also had to
reimburse a higher effective tax rate of 29% in 2QFY9/22 (vs. 28.3% in 2QFY9/21). The
group explained that it had to recognise some deferred tax expenses in 2QFY9/22.
Nonetheless, at 43% of our full-year forecast, EITA’s 1HFY9/22 core net profit was in line
with our expectation; we look forward to sequentially stronger earnings on the back of
more business activities following the economy’s reopening.
Rising input costs can be mitigated by maintenance division
The 52.2% qoq drop in EITA’s 1HFY22 core net profit may raise investor concerns over
possible margin compression as raw material prices soared in the aftermath of global
lockdowns and geo-political tensions. Its 2QFY9/22 EBITDA margin came to 7.9%,
thinner than the preceding quarter’s 10.6%. On the bright side, its highly cash-generative
maintenance division’s 1Q-2QFY9/22 pre-tax profits of RM3.7m-4.2m far surpassed its
pre-pandemic quarterly average of RM3.3m. Should the segment grow further, we
believe it could help negate the debilitating effects of rising input costs.
Reiterate Add, TP lowered from RM1.87 to 93 sen
In the 9-15 May edition of The Edge Weekly, EITA’s Managing Director Mr. Fu Wing
Hoong said the group is hopeful that it can secure an overseas partner in the next “one or
two years” so that it can bring its lift maintenance expertise to another market, preferably
Thailand. This foray, he said, should catalyse EITA’s earnings growth. A short-term
catalyst that we see for EITA is the contract awards for the Circle Line of the Klang Valley
Mass Rapid Transit (MRT3), as EITA has a track record for providing lift and escalators
for Malaysia’s mega projects. While we keep our Add call, we cut our TP to 93 sen,
valuing the stock at 9x CY22F P/E (c.70% discount to global elevator manufacturers’
historical weighted average, from 40% previously). This is to take into account the risk of
rising input costs. Downside risk: raw material prices spiking further. New mega
infrastructure projects and, more specifically, MRT 3 are the stock’s re-rating catalysts.