Analysis of Ekovest Berhad

Dear Readers

To recap, shares in Ekovest Berhad (“Ekovest“) closed at RM1.43  on 3 May 2017. However on 4 May 2017, its shares tumbled and closed at RM1.17. That’s a steep drop of 18.18%. That drop was a ripple effect caused by the termination of the development arrangement between, Iskandar Waterfront Holdings Sdn Bhd and its joint venture partner,  China Railway Engineering Corp, and TRX City Sdn Bhd, an entity own by the Ministry of Finance.

The common denominator between Iskandar Waterfront Holdings Sdn Bhd and Ekovest is the major shareholder of both said companies, Tan Sri Lim Kang Hoo.

But was the selling pressure justified? Without further ado, let’s jump right into the analysis of Ekovest.

1

Introduction

Ekovest is a construction company which operates three distinct businesses namely:

  1. Construction.
  2. Property development.
  3. Toll operations/concessionaire.
Construction

Ekovest, through its related companies, are involved in major construction projects namely the River of Life (“RoL“), the extension of the Duta-Ulu Klang Expressway   (“DUKE“) Phase 2 and the Setiawangsa-Pantai Expressway (“SPE“).

Ekovest’s construction book order stands at RM5.3 billion at the end of FY2016.

River of Life

RoL project is a major rejuvenation project of the Klang and Gombak rivers in Kuala Lumpur. A budget of RM4.4 billion has been set aside for it. Ekovest’s wholly-owned subsidiary, EkoRiver Construction Sdn Bhd (“EkoRiver“), is the sole project delivery partner.

More recently, in May 2017, EkoRiver was awarded an 18-week project worth RM79 million to complete a section of the RoL project in the vicinity of Masjid Jamek.

Another wholly-owned unit,  Ekovest KL Bund Sdn Bhd, has also been cashing in on the RoL project. It entered into an incentive agreement with the government for enhancing existing sewage treatment plant in Bunus. Ekovest KL Bund Sdn Bhd will reap an estimated RM70 million for the cost-saving attributed from its enhanced design of the Bunus sewage treatment plant. This exercise will save the government a projected RM94.67 million.

DUKE Phase 2

Another major infrastructure project under Ekovest’s belt is the extension to DUKE, simply known as DUKE Phase 2. Duke Phase 2 costs an estimated RM1.1 billion and will be completed in mid-2017. This is despite its initial completion date, in December 2016, which Ekovest was unable to meet.

SPE

In early 2016, Ekovest was awarded a concession which includes the design, build, operation and maintenance of the SPE for 53½ years. SPE is a highway with a length of 29.8km. Upon its completion, SPE will be serving locations such as University Tunku Abdul Rahman, Wangsa Maju, Setiawangsa, Ampang, the Tun Razak Exchange & Bandar Malaysia development corridor and Kerinchi.

Ekovest has funded SPE through the issuance of Sukuk Wakalah of up to RM3.6 billion which has a rating of AA- . The tenure of the Sukuk Wakalah is for a period of 23 years and the issuance was completed on 23 August 2016.

Other funding sources include a RM500 million interest free reimbursement interest assisted scheme by the government  and RM850 million equity from Ekovest.

This project is ongoing and is estimated to be operational in 2020.

Property development

Other than construction, Ekovest has a commendable property development business in the thick of bustling Klang Valley. The crown jewel of Ekovest’s RM7.8 billion property development portfolio is none other than EkoCheras.

EkoCheras is a RM2.11 billion gross development value mixed development mall, service apartment, hotel and office tower development with about 1 million square feet of retail space. It is slated to be completed in December 2017.

EkoTitiwangsa is another development which is strategically located along DUKE and KL River City area. It will host 696 units of service apartments and some retail space.

Another notable development is Oasis Kajang which is largely a double-storey terraced house project.

Toll operation

Ekovest is the operator of DUKE, an 18 km expressway from the east to west of the northern corridor of Kuala Lumpur since 2009/2010 (I may be wrong).

By mid of 2017, DUKE Phase 2 is slated to be completed and operational. DUKE Phase 2 will be an addition to Ekovest’s growing list of recurring and sustainable income generators.

It is worth noting that Ekovest’s concessions in DUKE and DUKE Phase 2 were extended from an initial 34 years to 53 years, with the option to extend for another 10 years.

Financials 
DATA 2016 2015 2014 2013 2012
REVENUE (RM’000) 793582 438015 229126 140966 208948
PROFIT (RM’000) 155412 18512 13200 50071 72644
OPERATING PROFIT (RM’000) 285736 123026 138049 84066 89020
SHAREHOLDERS’ EQUITY (RM’000) 1317138 1182443 1098587 779424 410420
DEBT (RM’000) 2674480 2483714 2311361 1103931 223434
                                                                         RATIO
DEBT TO EQUITY RATIO 2.03 2.10 2.10 1.42 0.54
OPERATING PROFIT MARGIN 0.36 0.28 0.60 0.59 0.42
OCF RATIO 0.11 -0.30 0.26 -0.08 -0.15
PROFIT MARGIN 0.20 0.04 0.06 0.36 0.34
EPS (CENTS) 18.2 2.2 7.2 25.1 40.6
EPS (ADJUSTED) CENTS 7.31 0.87 2.20 2.57 3.40
DPS CENTS 3 2 2 1 5
DIVIDEND PAY OUT 0.16 0.90 0.28 0.04 0.12
P/E 8.26 47.22 15.62 11.30 6.15
ROE 11.80 1.57 1.20 6.42 17.70

FY2016 was a tremendous year of success for Ekovest. The group improved in many areas such as revenue, profits, earnings per share, return on equity, cash flow/ liquidity and profit margin.What stood out the most was the 700% increase of its return on equity from FY2015.

A low dividend pay out in FY2016 indicates that Ekovest intents to retain its profits to be reinvested in its projects. This is a prudent decision by the management having to take into consideration the increasing numbers of capital-intensive projects that Ekovest is undertaking.

The improvement in Ekovest’s financials is attributed largely to the construction segment. I foresee that this segment will continue to contribute favourably to Ekovest’s revenue and earnings because of its enlarged book order of about RM5.3 billion (as at FY2016) in the span of 4 years to come.

From my calculations, Ekovest has a commendable growth rate of 16.5% based on earnings per share. Financial Times, on the other hand, has calculated Ekovest’s growth rate at 20.15%, based also on earnings per share. Sustainable growth rate (a company’s growth rate without borrowed money) is calculated about 10%. These are surprisingly good growth numbers.

Potentials

In January 2017, Ekovest was successful in receiving a principal approval for another highway concession, dubbed DUKE 2A. The proposed DUKE 2A consists of the privatisation of Kampung Baru Link, Istana Link and Kapar Link Expressway with a proposed length about 75km. The estimated cost of DUKE 2A is in the region of RM6.3 billion. Ekovest’s construction book order may swell to RM11 billion, from its current RM5 billion, if Ekovest was awarded the construction of DUKE 2A as it had for DUKE Phase 2 and SPE.

Also in January 2017, Ekovest entered into a joint venture with the Samling group from Sarawak to construct a 95.4km stretch of road from Semantan to Sg Moyan Bridge plus Kuching-Serian roundabout interchanges worth RM2.11 billion. This is part of the colossal Pan Borneo Highway. The group holds a 30% equity in the joint venture.

There are also talks about floating DUKE  and DUKE Phase 2. So far, nothing about the float is concrete.

Conclusion

I like Ekovest for its:

  1. Improving financials.
  2. Good growth rates.
  3. Ability to secure major infrastructure projects.
  4. Ability to deliver major infrastructure projects.

I don’t like Ekovest because of its heavy reliance on concessions from the government (then again, major infrastructure projects are usually initiated by the government).

Disclosure

I own shares in Ekovest.

Reference
  1. Ekovest’s Annual Report 2016
  2. http://www.thestar.com.my/business/business-news/2017/05/03/bandar-malaysia-agreement-with-iwh-crec-lapses/
  3. http://www.theedgemarkets.com/article/ekovest-managing-director-share-sell-down-temporary
  4. http://www.duke.com.my/
  5. https://www.ekovest.com.my/
  6. http://www.thestar.com.my/business/business-news/2016/10/24/ekovest-clinches-rm255mil-new-river-of-life-contract/
  7. http://www.thestar.com.my/business/business-news/2017/04/19/ekovest-may-gain-up-to-rm71mil-in-govt-incentive-payment/
  8. http://www.nst.com.my/business/2017/04/232405/ekovest-unit-signs-incentive-deal-govt-bunus-stp-enhanced-design
  9. http://www.thestar.com.my/business/business-news/2016/08/19/epf-mulls-buying-a-40pc-stake-in-duke-highway-from-ekovest/
  10. http://www.thestar.com.my/business/business-news/2016/09/21/epf-buys-40pct-stake-in-duke-highway-operator-for-rm1pt13b/
  11. http://ekovest.listedcompany.com/newsroom/ENG-PR-EKOVEST_INKS_40_PER_CENT_DUKE_SALE_WITH_EPF_FOR_RM1.13B.pdf
  12. http://www.theedgemarkets.com/article/ekovest-gets-concession-rm374b-setiawangsa-pantai-expressway-project
  13. http://www.thestar.com.my/business/business-news/2016/07/18/ekovest-to-launch-issue-sukuk-of-up-to-rm3pt64bil/
  14. http://www.thestar.com.my/business/business-news/2016/08/16/ekovest-to-issue-sukuk-for-expressway/
  15. http://www.nst.com.my/news/2017/02/208902/ekovest-targets-listing-2-more-divisions-bursa
  16. http://www.thestar.com.my/business/business-news/2017/01/19/ekovest-surges-after-winning-highway-concession/
  17. http://www.thestar.com.my/business/business-news/2017/01/06/ekovest-joins-pan-borneo-highway-project-with-jv-work-package-worth-rm2bil/
  18. https://markets.ft.com/data/equities/tearsheet/financials?s=EKOVEST:KLS
  19. http://www.theedgemarkets.com/article/insider-moves-datasonic-group-bhd-gabungan-aqrs-bhd-ekovest-bhd-boon-koon-group-bhd
  20. http://www.malaysiapropertyreviews.com/ekocheras/
  21. https://www.pressreader.com/malaysia/the-star-malaysia-starbiz/20160521/281492160549966