Wednesday, October 23, 2013

Salcon Berhad - Coming Home (Kenanga)

Salcon Berhad -
Current - RM0.645
Consensus Buy RM0.87
Coming Home

INVESTMENT MERIT
- Timely exit from China. Recently, Salcon Bhd (SALCON) announced the disposal of its entire water and waste water asset in China to Beijing Enterprises Water Group Limited for a total consideration of RMB955m (approximately RM518.3m), giving a net gain of RM94.6m. We are positive with Salcon’s move as this provides an opportunity to realise and unlock the value in its China concession investments. The cash raised will reduce its current outstanding debt by 98% to only RM8m and thus turning the company into a net cash position. The disposal is timely given that the operating environment in China had become more challenging as compared to previous years.


- Special dividend on the cards? Management indicated that post disposal of its China assets and debt repayment, they are likely to announce a special dividend to reward its shareholders. However, the quantum had yet to be decided. Assuming a 20% payout from its net cash position of RM276.0m, Salcon could possibly pay out 9 sen/share translating into about 14% yield to its current share price.

- Bright orderbook replenishment prospect. We believe that the disposal of its China assets would allow SALCON to focus and grow its operations back home in Malaysia. SALCON is one of the front-runner for the Langat 2 project worth c.RM1.0b along with its JV partner namely MMC Corporation and Ahmad Zaki Resources. Its tender book in Malaysia comes up to RM2.5b. However, we only imputed a conservative orderbook replenishment assumption of RM150m for FY14 at this juncture, as high profile water-related projects are highly competitive. However, there could be huge upsides should they secure sizeable contracts like Langat 2. Its outstanding orderbook stands at c.RM330m which could easily last the group for the next 2 years.

- Diversification into property. SALCON had taken a bold move into the property sector with its maiden project, Res280 in Selayang with an estimated GDV of RM160m, selling at a indicative price of RM480-500 psf which has received strong take up rate of 60%. In addition, Salcon has also signed a letter of intent with Eco World to jointly develop 2 pieces of land, measuring 51,476 sqm in Johor with an estimated GDV of RM1.2b which the management is targeting to launch by 2H14. We estimate that the property division will see higher contribution of 71% to Salcon’s earnings in FY15 should these two projects take off as planned.

- Not Rated… We conservatively value SALCON between RM0.67 to RM0.75 using SOP valuation methodology (ranges between RM0.60-RM0.67, base on 0.64x to 0.72x FY14 PBV; plus RM0.08, 60% discount to its property RNAV of RM0.19) with a Not Rated recommendation as our Target Price implies a range of 24.8x and 27.7x to our FY14E earnings estimates. Our targeted PBV of 0.64x ranges from -0.5 standard deviation to Salcon’s 5-year forward average PBV of 0.72x. For its property segment, our 60% discount to its RNAV is the steepest discount applied to small-cap ( < RM500m) i.e. Global Oriental Bhd. However, we are optimistic with Salon’s foray into the property sector as a diversification move, away from its water business. Risks lies with failure to execute the Letter of Intent with Eco World.

TECHNICALS
- Resistance: RM0.665 (R1), RM0.715 (R2)
- Support: RM0.630 (S1), RM0.590 (S2)
- Comments: SALCON’s is heading towards two months downward slopping triangle apex and fibonacci fan’s lower support line with scantly volume. Hence, technical suggest SALCON could be on the verge of a decisive breakout (upside/downside). We suggest trader to watch for a decisive upside breakout above RM0.665 before buying.

BUSINESS OVERVIEW
SALCON is the leading water and wastewater engineering company in Asia, offering value-added services in the investment, design, construction, commissioning, operation and maintenance of water and wastewater treatment plants and ancillary facilities. Since 1974, Salcon has successfully completed more than 500 water treatment and 300 wastewater projects in Malaysia, Thailand, Vietnam and China.

BUSINESS SEGMENTS
- Water solutions (Construction). Provides end-to-end water solutions from raw water management, design, construction, commissioning, operation and maintenance of water treatment facilities including downstream activities ie non-revenue water reduction, customer service, billings and collection.

- Waste water solutions. Provide turnkey and specialist engineering services for the design, supply, construction, installation, testing and commissioning of various of sewage treatment systems.

- Concession. Salcon owns and operates 9 water concessions and 2 wastewater concessions in China and Vietnam. However, Salcon has decided to dispose most of its concessions in China for a total consideration of RM518.6m.


Source/Extract/Excerpts/来源/转贴/摘录: Kenanga-Research,
Publish date: 22/10/13

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