Business Profile
- A reputable water & wastewater treatment specialist in Asia. Since its inception in 1974, Salcon has successfully completed more than 900 water and wastewater treatment projects (WTP) in Malaysia, Thailand, Vietnam, Sri Lanka & China. Salcon also diversified into (1) property segment in 2013 with its maiden project, rés28 in Selayang (~RM200m GDV) and (2) telcos infrastructure in 2015 via a 50%+1 share stake in Volksbahn Technologies S/B (VT) that hold the exclusive rights to lay fibre optic cables on Prasarana Malaysia Bhd rail network and premises for up to 15 years. Investment
Highlights
- Strong earnings growth in 2016/2017. Earnings growth will largely be driven by the acceleration of progress billings from the RM600m orderbook (big chunk from Langat 2 WTP), maiden contributions from VT and profit recognition from rés28 upon its full completion.
- Robust tender book over RM2.2bn. Salcon is currently bidding a total tender book over RM2.2bn (80% domestic and 20% overseas) with management's target of a 20-30% success rate. These jobs include the Langat 2 WTP Phase II contracts, new alternative water supply jobs in Selangor and the projects from 11MP to reduce nonrevenue water (NRW) to 25% from 36.6% in 2013.
- Expanded warchest as netcash will increase to ~RM240m after completing the last concession. Salcon will be looking to finalise the asset disposal in China by 3Q16. The completion of the dis posal will s ee Salcon’s netcash s oaring to RM240m from RM200m (or RM0.295) as at end-Dec 15, translating into netcash/share of circa RM0.35, equivalent to 56% of the current share price. We expect a higher dividend payout of 3.5sen in FY16/17 from 3.0sen in FY15.
- Active share buyback outlining conf idence of Salcon’s prospects. Salcon engaged an active treasury share buyback YTD amounted to 12.98m or 1.95% of its outstanding shares. Besides, its major shareholder, Infra Tropika S/B, had accumulated ~5.6m shares YTD, translating into 78.7m shares or holding a 11.5% stake. Thus, we see strong cushion to protect Salcon’s share prices from the downside.
Catalysts
- Higher dividends; Securing sizeable contacts in the Langat 2 Phase II projects; Earlier-than-expected recovery in the property sector; More contract flows from VT.
Risks
- Execution risk; Regulatory risk; Rising raw material prices; Prolonged downturn in the construction and property cycle; and currency risk.
Forecasts
- Although short of divulging any forward guidance, we opine that management is cautiously optimistic of better earnings prospects in FY16 and FY17, given its strong orderbook ~RM600m. Management’s target of a 20-30% success rate of ~RM2.2bn tenderbook (RM440m-660m worth of new wins) is not a tall order given its expertise in the WTP business.
Rating
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Valuation
- We derive our TP of RM0.84 based on peers ’ comparis on P/B of 0.99 on latest BVPS of RM0.85. The relatively high FY17 PE of 25.5x (only 11.2x ex-cash RM0.295) or 0.28x PEG (PE/EPS 15-17 CAGR) is justified given its expected strong earnings growth in FY16 and FY17 (133% and 54% respectively). Together with an expected DY of 5.6%, we expect a superb total return of 40%!
SALCON (8567) - Salcon Berhad - A turnaround year in 2016, backed by solid balance sheet and domestic growth catalys
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