Salcon Bhd
(Aug 28, RM0.595)
Maintain add with a lower target price (TP) of 98 sen: Although Salcon posted a first half ended June 30, 2015 (1HFY15) core net loss of RM5.9 million (excluding RM14.4 million net foreign exchange gain) versus our and consensus full-year net profit forecasts, we consider the performance to be broadly in line. 

We believe Salcon should stage a major profit recovery in 2HFY15 as progress billings for the Langat 2 water treatment plant (WTP) picks up. Second quarter ended June 30, 2015 (2QFY15) construction earnings before interest and tax (Ebit) included maiden profits from Langat 2 WTP which forms the bulk of the group’s about RM600 million outstanding order book. 

The absence of dividends was not surprising as we expect a three sen first and final dividend per share in 4QFY15, implying an attractive 5% to 6% yield backed by its net cash balance of RM165 million (24 sen per share), representing 41% of its market cap. 

Salcon’s turnaround story of securing recurring earnings has begun to materialise with the first cellular site rental contract with U Mobile Sdn Bhd in mid-August. This is positive for its subsidiary Volksbahn Technologies Sdn Bhd (VBT); we estimate a base case of RM4 million to RM5 million in revenue per annum and higher margins over the next 10 years. 

VBT, which owns the concession to operate the only rail rights-of-way, has been actively pursuing other telcos to further expand its revenue. VBT had earlier inked an memorandum of understanding with Celcom Axiata Bhd and could sign an official contract in the short term. 

We forecast VBT’s contribution to Ebit to rise from 17% in financial year ending Dec 31, 2016 (FY16) to 19% in FY17. 

Following the recent market selldown, the stock now trades at a massive 63% discount to our base case revised net asset value per share of RM1.62, and at an ex-cash FY16 to FY17 price-earnings ratio of seven to eight times. — CIMB Research, Aug 28

This article first appeared in digitaledge Daily, on September 1, 2015.