PP 7767/09/2010(025354)

RHB Research
Corporate Highlights
Malaysia
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note
13 September 2010
MARKET DATELINE

Emas Kiara Industries Share Price

Fair Value
:
:
RM0.56
RM1.52
Second Penang Bridge To Pick Up Where KLIA2 Recom : Outperform
(Maintained)
Leaves Off

Table 1 : Investment Statistics (EKIB; Code: 7189) Bloomberg: EKI MK

Net Net
FYE Turnover Profit# EPS# Growth PER C.EPS* P/CF P/NTA ROE Gearing GDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009 137.5 9.8 11.7 (12.0) 4.8 - (56.2) 0.6 12.6 0.6 2.7
2010f 175.0 11.0 13.1 11.5 4.3 - 4.1 0.6 12.5 0.5 2.7
2011f 164.0 12.8 15.2 16.7 3.7 - 3.5 0.5 12.9 0.4 2.7
2012f 173.9 14.2 16.9 11.1 3.3 - 3.2 0.4 12.7 0.3 2.7
Main Market Listing /Non-Trustee Stock /Non Syariah-Approved Stock By The SC #Excluding EI * Consensus Based On IBES

♦ New orders from Second Penang Bridge, more from KLIA2. Emas
Kiara has recently secured combined new geodrain orders of about RM30m
Issued Capital (m shares) 84.0
from all the three contractors involved in the land portion works of the Market Cap (RMm) 47.0
Second Penang Bridge, as well as the other earthwork contractor of the Daily Trading Vol (m shs) 0.008
KLIA2. The new geodrain orders from the Second Penang Bridge are 52wk Price Range (RM) 0.35-0.60
particularly timely as they will pick up where those of the KLIA2 are going Major Shareholders: (%)
to leave off. Roger Wong and family 30.6

♦ Coastal highway projects and India to drive future demand. Over

See Chii Wei 8.5

the short to medium term, new orders will be underpinned by remaining

works at the East Coast Expressway (geodrains), the potential revival of the FYE Dec FY10 FY11 FY12
West Coast Expressway (geodrains), as well as new contracts from the EPS Revision (%) - - -
Brahmaputra Dyke project in Assam, India (geodykes). The geodrain Var to Cons (%) na na na
supply and installation for the RM4.6bn West Coast Expressway, for
PE Band Chart
instance, may come up to as much as RM200m.
♦ To strengthen foothold in Europe. Emas Kiara is penetrating into the PER = 5x
European market in a more meaningful way via an OEM-like tie-up with an PER = 4x
PER = 3x
established player based in Europe. Emas Kiara’s value proposition to this
tie-up is its manufacturing capacity that the partner is lacking. The tie-up
also stands testimony to Emas Kiara’s internationally recognised product
quality.
♦ Forecasts. Maintained.
♦ Risks to our view. The risks include: (1) Weaker-than-expected pick-up Relative Performance To FBM KLCI
in the construction sector; and (2) Rising prices of crude oil, and hence
geosynthetics, making geosynthetics less attractive as alternative building Emas Kiara Industries
materials.
♦ Maintain Outperform. We are upbeat on the construction sector as we
foresee construction stocks to generally outperform the market in 2H2010, FBM KLCI

buoyed by news flow, particularly, from: (1) The RM36bn KL MRT project;
(2) The RM7bn Ampang and Kelana Jaya LRT line extension project; and (3)
Federal land deals. Fundamentally, Emas Kiara is well backed by: (1) The
rising acceptance of geosynthetic products as substitutes to, or to be used
along with, conventional building materials; (2) The rising awareness
Joshua CY Ng
towards environment protection, and in Malaysia, particularly, coastal (603) 92802151
erosion control and preservation of mangrove areas that are niche areas to joshuang@rhb.com.my
geosynthetics; and (3) Emas Kiara’s commanding market position in the
geosynthetics sector in Malaysia with an estimated market share of 60%.
Indicative fair value is RM1.52 based on 10x FY12/11 EPS, in line with our
1-year forward target PER for the construction sector of 10-16x.

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 Second Penang Bridge To Pick Up Where KLIA2 Leaves Off

♦ Highlights. Key takeaways from recent meeting with Emas Kiara are:
1. Emas Kiara has secured geodrain orders from all the three contractors involved in the land portion works of
the Second Penang Bridge, as well as the other earthwork contractor of the KLIA2 (or the new LCCT);
2. Over the short to medium term, new orders will be underpinned by remaining works at the East Coast
Expressway, the potential revival of the West Coast Expressway, as well as new contracts from the
Brahmaputra Dyke project in Assam, India; and
3. Emas Kiara is penetrating into the European market in a more meaningful way via an OEM-like tie-up with an
established player based in Europe.

♦ New orders from Second Penang Bridge, more from KLIA2. Emas Kiara has recently secured combined
new geodrain orders of about RM30m from all the three contractors involved in the land portion works of the
Second Penang Bridge, i.e. IJM, Cergas Murni Sdn Bhd and HRA Teguh Sdn Bhd (see Table 2), as well as the
other earthwork contractor of the KLIA2, i.e. Gadang (Emas Kiara in 2009 first secured a RM50m sub-contract
from WCT for the supply and installation of geodrains for Earthwork Package 1 of the KLIA2 project). The new
orders have helped to sustain Emas Kiara’s outstanding orderbook at RM70-100m, underpinning its earnings for
the next 1-2 years (Typically, contract-based orders make up 50% of Emas Kiara’s annual turnover, with the
balance 50% coming from regular sales). The new geodrain orders from the Second Penang Bridge are
particularly timely as they will pick up where those of the KLIA2 are going to leave off. We understand that the
RM50m contract for the supply and installation of geodrains for Earthwork Package 1 of the KLIA2 project, for
instance, is currently already about 70% completed. To recap, geodrains are a type of geocomposite comprising
a sheet of non-woven geotextiles wrapped around a polymer core. They are driven into the soft ground to drain
out ground water through capillary action to consolidate the ground prior to any construction work. They are
widely used in fast-track projects (for instance, the KLIA2) as they can effect ground settlement in 3-6 months,
vis-à-vis 2-3 years without geodrains.

Table 2: Land Portion Works Of The Second Penang Bridge

Package Scope Contractor Value
(RMm)
3A Batu Kawan Expressway (mainland) IJM 350.0
3B Batu Maung interchange (island) Cergas Murni Sdn Bhd 152.7
3C Batu Kawan trumpet interchange (mainland) HRA Teguh Sdn Bhd 67.3
Total 570.0
Source: Construction Industry Development Board Malaysia (CIDB), Bursa Malaysia

♦ Coastal highway projects and India to drive future demand. Over the short to medium term, new orders
will be underpinned by remaining works at the East Coast Expressway (geodrains), the potential revival of the
West Coast Expressway (geodrains), as well as new contracts from the Brahmaputra Dyke project in Assam, India
(geodykes). We understand that given the soft ground conditions along the coastal areas, substantial ground
treatment prior to construction work is needed for both the East Coast Expressway and West Coast Expressway.
The geodrain supply and installation for the RM4.6bn West Coast Expressway, for instance, may come up to as
much as RM200m. Also, we understand that Emas Kiara will submit bids for more packages measuring a total of
25km of the Brahmaputra Dyke project in Assam, India. Emas Kiara is currently completing the RM72m
Brahmaputra Dyke project measuring 5km it secured in 2009.

♦ To strengthen foothold in Europe. Emas Kiara is penetrating into the European market in a more meaningful
way via an OEM-like tie-up with an established player based in Europe. Emas Kiara’s value proposition to this tie-
up is its manufacturing capacity that the partner is lacking. The tie-up also stands testimony to Emas Kiara’s
internationally recognised product quality. While export sales normally command slightly lower margins vis-à-vis
domestic sales, a balanced domestic-export sales mix will provide Emas Kiara with a buffer against the downcycle
in the domestic construction market. In FY12/09, export sales already contributed about 50% of Emas Kiara’s
total turnover. Emas Kiara’s products are currently sold in more than 20 countries including those in South East
Asia and the Middle-East, as well as Australia, Greece, Bangladesh, India and Sri Lanka.

♦ Forecasts. Maintained.

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♦ Risks to our view. The risks include: (1) Weaker-than-expected pick-up in the construction sector; and (2)
Rising prices of crude oil, and hence geosynthetics, making geosynthetics less attractive as alternative building
materials.

♦ Maintain Outperform. We are upbeat on the construction sector as we foresee construction stocks to generally
outperform the market in 2H2010, buoyed by news flow, particularly, from: (1) The RM36bn KL MRT project; (2)
The RM7bn Ampang and Kelana Jaya LRT line extension project; and (3) Federal land deals. Fundamentally,
Emas Kiara is well backed by: (1) The rising acceptance of geosynthetic products as substitutes to, or to be used
along with, conventional building materials; (2) The rising awareness towards environment protection, and in
Malaysia, particularly, coastal erosion control and preservation of mangrove areas that are niche areas to
geosynthetics; and (3) Emas Kiara’s commanding market position in the geosynthetics sector in Malaysia with an
estimated market share of 60%, with an edge over its local competitors by virtue of its vertically-integrated
operation and a wide product range, and over the operations of foreign players in Malaysia by virtue of its
comparatively low cost structure. Indicative fair value is RM1.52 based on 10x FY12/11 EPS, in line with our 1-
year forward target PER for the construction sector of 10-16x.

Table 3: Earnings Forecasts Table 4: Forecast Assumptions

FYE Dec (RMm) FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 137.5 175.0 164.0 173.9 EBIT margin (%) 11.2 13.0 12.8
Turnover growth (%) -8.5 27.3 -6.3 6.0

EBITDA 22.0 26.3 28.7 30.4

EBITDA margin (%) 16.0 15.0 17.5 17.5

Depreciation -6.1 -6.7 -7.4 -8.1

Net Interest -4.8 -4.9 -4.2 -3.3
Associates 0.0 0.0 0.0 0.0
EI 0.0 0.0 0.0 0.0

Pretax Profit 11.1 14.6 17.1 19.0

Tax -2.6 -3.7 -4.3 -4.7
PAT 8.5 11.0 12.8 14.2
Minorities 1.4 0.0 0.0 0.0
Net Profit 9.8 11.0 12.8 14.2
Source: Company data, RHBRI estimates

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 Technical Viewpoint: Emas Kiara Visit Note (13 Sep 2010) – EKIB

Chart 1: EKIB Technical View Point

♦ After consolidating since Mar 2004 from a high of
RM1.15, the share price of EKIB hit a floor at
RM0.25 in Jul 2007, before triggering a technical
rebound in late 2007.

♦ As the recovery failed at a resistance near RM0.50

in early 2008, the stock turned weaker again and
hit a fresh low of RM0.23 in late 2008.

♦ Thereafter, the stock started a slow recovery pace,

with a constant low volume trading environment in
recent years.

♦ It managed to surpass the RM0.50 level in Jan

2010, and since then it has been congesting around
the RM0.50 – RM0.60 region.

♦ Closed at RM0.56 last week, the stock is still

trading along the slow uptrend that kicked off since
2008.

♦ The 10-day SMA has just recovered to above the

40-day SMA, indicating the positive medium-term
uptrend is likely to continue.

♦ Chart wise, its stronghold support is at RM0.50.

And if it sustains at above this level, it will slowly
climb towards the RM0.675 resistance level in the
medium term.

♦ Beyond that, it will see a stronger momentum

towards the RM0.85 level.

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IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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