KUALA LUMPUR — Ekovest is a deeply undervalued contractor and concessionaire, as per the recent announcement of its 40% sale of Duta-Ulu Kelang Expressway (DUKE) 1 and 2 to the Employee Provident Fund (EPF).
UOB Kay Hian in research note last Friday, the EPF deal implicitly values just one of its many assets at RM2.8 billion, significantly below its RM1.7 billion market cap.
Ekovest recently announced that it has entered into a binding term sheet that would see it disposing of a 40% equity stake in Konsortium Lebuhraya Utara-Timur (KL), the holding company of the DUKE 1 and 2 highway, to EPF for RM1.13 billion.
“This sum implicitly values the expressways at RM2.82 billion versus Ekovest’s market cap of RM1.69 billion. While the group has made no official commitments, we do not discount the possibility that part of the cash proceeds would be declared as special dividends in the near term,” said UOB Kay Hian analyst Ridhwan Effendy.
Ekovest’s longer-term outlook was given a boost with the recent announcement that it has been granted a 53.5-year concession to build, operate and transfer the new 50km Setiawangsa-Pantai Expressway (SPE) (formerly known as DUKE Phase 3) that links MRR2 at Taman Melati to Kerinchi Link at Federal Highway.
Effendy opined that alongside the benefit of obtaining a concession, the new expressway would enhance Ekovest’s medium-term order book visibility, as the group would snap up much of the construction jobs worth over RM3.7 billion.
“We expect the construction jobs to contribute RM139 million to RM212 million per annum to Ekovest’s financials for the next three years,” he said.
The analyst sees Ekovest’s RM4.5 billion external outstanding order book represents a superior order book cover of 5.6x, significantly above that of other construction companies under UOB Kay Hian’s coverage, which usually ranges from 1.7x-3.8x.
“About 84% of the outstanding order book is from the SPE. We gather that the group is aiming to secure another RM1b worth of infrastructure-related construction jobs in FY17,” he said.
UOB Kay Hian said it initiates coverage on Ekovest with a “buy” call with a target price of RM3.00, based on a 40% discount to its fully-diluted sum-of-the-parts valuation of RM5.00 per share.
“We ascribe a huge discount to the valuation to reflect risk factors that cannot be accurately modelled, particularly for the DUKE 1 and 2 highway concessions due to their long concession periods.
“We like Ekovest for its undervalued concession asset whose value has yet to be appreciated, its huge construction order book backlog that is significantly above that of other construction companies under our coverage, and the good locations of its land banks.
“Our target price implies a 2018 financial year forecast (FY18F) price-to-equity ratio of 18.2x, which is also supported by a strong three-year (FY16-19F) earnings combined annual growth rate of 68.6%,” said the research house.
UOB Kay Hian said its equity discounted cash flow (DCF) valuation for DUKE 1 and 2 is at RM3.16 billion. As both DUKE 1 and 2 are concessions that deliver a stable cash flow, we believe the DCF method would be appropriate for valuing the two expressways.
In the valuation methodology, the research house has assumed a discount rate of 7.1%.
“Our valuations for DUKE 1 and 2 are at a slight premium to EPF’s implied purchase price of RM2.825 billion for the expressways.”