We have previously highlighted in our last four analysis on T7Global's share price potential. Based on 26 Jan 2018's share price and volume traded, we reckon that investors are starting to appreciate the potential of T7Global.
On the fundamental front, we believe that the main catalyst for T7Global is their strong collaboration via joint venture with China State Engineering Corporation (CSEC). We believe that the Group's collaboration with CSEC could potentially elevate the Group into a Malaysia renowned high value engineering company with strong network with the government.
Bandar Malaysia catalyst:
Recall that the lucrative Bandar Malaysia development project worth RM40bil, had 7 China and 2 Japanese conglomerate bidders, namely:
7 China conglomerate bidders:
i) China State Engineering Corporation (Master developer and constructor of Exchange 106, Bandar Malaysia's Signature Tower)
ii) China Communications Construction Company (Master constructor of East Coast Railway Link ("ECRL"))
iii) China Gezhou Group
iv) Greentown Overseas
v) China Resources
vi) China Vanke
vii) John Holland, Australia (Wholly owned by China Communications Construction Company)
2 Japanese conglomerate bidders:
i) Daiwa House Industry
ii) Mitsui Fudosan
We believe that the T7-CSEC joint venture stand the highest chance to clinch the Bandar Malaysia master developor contract, premised on:
i) CSEC is the main constructor of the Signature Tower of Bandar Malaysia
ii) China Communications Construction Company's work capacity is full due to large commitment to ECRL
iv) Visible near term prospect due to the fact that CSEC is the only China-based Group that formed a joint venture with a local Malaysian company (Recall that CREC had formed a joint venture with IWCity to bid and win the Bandar Malaysia contract)
v) Previous frontrunner, Dalian Wanda has been barred from bidding for contracts outside of China, paving the way for CSEC to win.
vi) CSEC is the largest construction company in the world by market capitalization, thus boasting an excellent track record at mega projects.
Recall that ECRL contracts would be dished out between January 2018 to April 2018. We gather that due to China Communications Construction Company's close relationship with CSEC, the T7-CSEC joint venture stand to win a large pie of ECRL contract. Based on our understanding, T7-CSEC joint venture could be close to winning a large contract to provide manpower services, downtime engineering and commissioning services, grid electrification, supply of infrastructure project to ECRL line 1,2,3 that could be worth in the region of RM1.8bil.
Oil and gas catalyst:
Based on current jobs in hand, T7 is managing and delivering projects worth RM800mil, mainly to Petronas and large oil conglomerates. We believe that in view of the high brent crude price, T7 would on its own win another RM600mil (Based on RM2bil tenderbook) oil and gas contract from large oil nationals.
We believe that T7's strength lies in its well connection with the government, highly skilled and competent directors with well versed skill in engineering and oil and gas, newly revamped branding and culture (Moving on from Tanjong's legacy), huge potential for Malaysian mega infrastructure project due to close connection with China conglomerates.
Based on 26 Jan 2018's share price close of RM0.585, the Group is valued at only RM240mil. Despite trading at 1.5 times book value which could look on the high end, the book value only takes into account the investment cost of the joint venture, as future profits of the joint ventures are not factored into the book value. Taking into account the earnings upside and catalyst, we used a ranged valuation for the Group by using 1.25x forward book value and 12x forward PER for 2018-2019.
Based on that, we believe that T7's share price should be trading at a range of RM1.72 - RM1.87 (Market capitalization of RM700mil), of which we still deem undervalued as we have not factored in the earnings potential of its aerospace division on its Kilgour Group, which would add another RM0.30/share to its share price.