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EITA (5208) is an industrial stock that relies heavily on construction industry. This company is known as manufacturer of elevators and lifts, with more than 3500 units installed. However this is not its only business segment. With current share price of around RM0.82, expected dividend yield is around 3 to 4%.

(Last update: 24th Mar 2021 based on FY2020 annual report published on 22nd Jan 2021 and quarterly report issued on 22nd Feb 2021. Updates are made in red. For readers that would like to read superseded version, please free to contact by email)

Background of EITA

EITA was founded by a group of people in 1996 and listed in KLSE in 2014. The founders are still managing the company, including group managing director Fu Wing Hoong and executive director Lim Joo Swee. Each of them holds 19% and 14% of EITA respectively. However interestingly, neither of them is the biggest shareholder of the company. The biggest shareholder is one of the founders of QL Resources, Chia Seong Pow, holding 23% of company at the time of writing.

While EITA is known as the only local manufacturer of elevators and escalators in Malaysia, their business is not limited to only this. EITA has done few acquisitions over the past year and owns a group of companies doing different businesses. Overall, the company mainly engages in electronics and electrical-related business.

Business model of EITA

EITA categories its businesses into the following four segments in their financial reports.

• Design and Manufacturing
• Marketing and distribution
• Services
• High voltage system

1. Design and manufacturing

This segment is the main revenue driver of the company, which designs and manufactures own brand of products, including EITA-Schneider for elevator systems and Furutec for Busduct Systems.

For information, busduct is a ducting to conduct electricity from one place to another. In 2021, EITA has launched a new busduct product designed for digital centers, which is a segment growing rapidly.

2. Marketing and distribution

EITA not only sells own brands, but also act as distributor of other brands of electrical and electronics (E&E) products, such as Fuji Electric, Panasonic, General Electric etc. These components are used for construction and industrial sectors.

3. Services

Elevators and escalators require regular maintenance, and this is what this segment is doing. Up to financial year of 2020, EITA has installed more than 3500 units. As installation base grows, this segment will continue to grow in tandem, providing a decent recurring income.

4. High voltage system

This is a new segment after acquisition of 60% stake of TransSystem Continental (TSC). TSC specializes in installation of electrical substations for power sector. This segment has started to yield fruits especially from financial year 2019, and will be one of the growth momentums of EITA.

Overview of business model

From its diversified business in E&E sector, we can summarized three ways of how EITA make moneys, which are construction contracts, direct selling of goods and servicing.

Although Design & Manufacturing is the number one contributor to revenue, servicing is the segment that makes the most profit. As you can see from chart below, in financial year 2021, manufacturing contributed 37.4% revenue and 31.1% profit, while serving contributed 12% revenue but 38.7% of profit.

Profit margin of servicing is much higher than other segments. Upon installation of elevator systems, EITA normally will provide up to two years of free-of-charge maintenance. After that, maintenance will be chargeable and EITA. In annual general meeting in year 2018, management has said that they maintained up to 90% of elevator systems they installed.

EITA has about 3500 units of elevator installed in Malaysia or about 10% of market share. Servicing is definitely bread and butter that sustain the company.

On the other hand, EITA do have oversea sales, which normally contribute around 15-20% of the revenue. However in FY2021, due to the pandemic, contribution of oversea sales has dropped to 12.7%. Note that oversea sales are mainly driven by sales of busduct and cables instead of elevator.

Prospect

One of the most known project done by EITA is its involvement in MRT-1 project, which includes the longest underground elevator in Southeast Asia at Bukit Bintang MRT station. MRT 1 was one of the biggest driver of its revenue growth in year 2016 and 2017.

Following completion of MRT 1 project in 2017, there was a significant drop in manufacturing segment revenue in 2018 and 2019. However EITA managed to fill the gap with new high voltage substation projects through acquisition of TSC. Therefore revenue as a whole, does not see significant decline.

Following its successful execution of MRT 1 project, EITA has also secured one above ground elevator package for MRT 2 worth RM52 million and also all above ground elevators for LRT 3 worth RM67 million. MRT 2 will be completed in 2022. For LRT 3, first delivery will be in Feb 2021 and their scope for LRT 3 is expected to complete by December 2022. I expect this will become a strong ground for manufacturing segment in 2022. In Mar 2022, government has also given greenlight for MRT-3 project. Although escalator portion of contract is not expected to be awarded so soon, judging from the past LRT & MRT projects, I expect EITA to be one of the beneficiaries of MRT 3.

Looking into longer term, with rolling out of more high rise buildings, infrastructure projects (east coast ECRL, MRT 3, Penang LRT etc.), EITA being the only local manufacture for lifts and elevators, will definitely be one of the beneficiaries. The increase of electrical demand will also create more HV substation projects that EITA can benefit from it.

Financial

Net cash company

According to the latest financial report ending Dec 2021, company has RM108 million of cash and RM61 million of borrowing, so it is a net cash company.

Currency risk and profit margin

Businesses of EITA are exposed to multiple currencies, including USD, SGD and RMB. Company has revenue dominated in USD and SGD, while there are imported material costed in USD and RMB. On high level, strengthening of MYR against USD and RMB is good for company, but strengthening of MYR against SGD is bad.

Company uses forward exchange contracts to manage currency risk. The associated realized foreign exchange gain or loss is captured by company under “other operating income/expense”. This is one of the main reasons why there are ups and downs in net profit margin of the company. For instance in 2015 and 2016, company recorded about RM10m realized forex gain in one year but about same amount of loss in another year. Therefore it is important to understand how much forex has affected bottom line to truly evaluate its performance.

If just looking at gross profit margin, it has actually been quite consistent for the past five years, with the range of 25% to 30%.

Dividend payout

Company does not have dividend policy in place but has been giving dividends twice a year. Below is the dividend payout history.

• 2015 – 26.5%
• 2016 – 32%
• 2017 – 32.9%
• 2018 – 44%
• 2019 – 35.6%
• 2020 – 42.6%
• 2021 – 38.9%

I think the dividend payout is within a comfortable range, with equilibrium between rewarding shareholders and keeping capital for growth.

Financial highlights (Quarterly report of 2021 Q4 / FY2022 Q1)

• For quarterly result ending December 2021, there is significant improvement compared to last quarter and also the same quarter in 2020.

• For FY2021 Q1, servicing and high voltage system are the two segments contributed the highest profit, amounting to 37% and 32% respectively. Servicing has been the segment contributed the highest profit all this while. However profit contributed by high voltage system had not been significant until the most recent quarter, so it was a surprise to me.

• Order book of company remains healthy at RM365 million as of Sep 2021. Note that unlike traditional construction company, order book cannot be fully relied to predict their future revenue. As mentioned before, EITA make moneys from construction contracts, direct selling of goods and servicing. Order book only provides visibility of future revenue derived from construction contracts

• In FY2021, it can be observed that cash flow from operation is not proportional to profit made, and the reason is a big chunk of revenue has turned into contract asset instead of real cash. Likely because of this, EITA has made some short-term borrowings for working capital purpose. In the latest FY 2022 Q1, short term borrowing is RM47 million, which is a significant increase from RM24 million in FY2021 Q4 and RM15 million in FY2020. Normally this should be a red flag for investors. However based on my understanding of EITA, this should not be a concern because (1) with the increased short term borrowing, EITA is still a net cash company (2) similar thing has happened before when EITA executed MRT 1 project, because money would be paid by customers only after a certain period after project milestone completion. Management from EITA did explain in the 2022 AGM also, saying “due to recommencement of work at respective project sites. During the various movement control imposed by government during FY2021, work progress on project sites experienced some delays. In addition, non-essential services were only allowed to operate at a certain capacity. The combination of both factors led to delays in the processing and approval of the projects’ progress claim, which resulted in increase in contract assets”.

• In 2022, EITA expects the business environment to recover but rising cost of raw materials and increase in shipping and freight cost may impact the Group’s profit margin

End

Compared to other construction companies, EITA is relatively stable and there’s what I like about it. Its stability largely comes from servicing segment which generates recurring income, even during economy downturn.

Personally I am optimistic about their business in next 1-2 years, mainly because contribution coming from completion of MRT 2 and LRT 3 projects. I also expect improvement in servicing segment as I guess some elevator maintenance work was delayed during COVID period.

After announcement of bonus issue in Nov 2020, its share price has once spiked up to RM2.80, which honestly I thought was too high. And now it has finally come to a share price that I feel more reasonable, and could be worthy for interested investors to spend more time looking into its business.

In case you want to know more about dividend investing, feel free to check out my article about ultimate guideline for dividend investing here.

Disclaimer: This article is purely my notes from studying this company. This is not a BUY or SELL call. I am not a registered investment advisor nor an investment guru, please be reminded to do your own homework and invest at your own risk.