Vivocom Intl Holdings Bhd
(July 13, 12 sen)
Maintain buy with a target price (TP) of 40 sen: We emerged from our meeting with Vivocom Intl Holdings Bhd executive director Choo Seng Choon feeling reassured with our estimates. Year to date, Vivocom’s share price has decreased 36.11%, and comparatively, 53.63% from its high in May 2016. Guided by our observation, Vivocom presents a very attractive yield of +10.5% on the back of +6.75% spread against the five-year Malaysian Government Securities yield of 3.76%.
Turning to its progress, we believe concentration is vital to maintain Vivocom’s high margins. Closely, the management stresses on maintaining margins through concentration of design and build contracts, and affordable housing. We remarked in our last report that Vivocom would not be able to maintain its 14.7% operating margin for the financial year ending Dec 31, 2017 (FY17) and FY18. However, the management has indicated that the margins are attainable albeit blips in between progress billings and revenue recognition due to its total order book size of RM2.3 billion inclusive of projects from Neata Aluminium. We are confident that earnings will grow stronger in FY18, backed by its strong revenue growth and profit margin compared with its peers.
For affordable housing, the management has indicated that Perak and Terengganu present stable opportunities as demand is continuous there. Looking at Perak, demand for residential projects has maintained its growth trajectory. Similarly, in Terengganu, residential projects are stable notwithstanding the smaller scale. We are expecting Vivocom to replenish RM600 million of jobs for FY17/FY18/FY19, led by affordable housing and mixed developments.
On the basis thereof, we reaffirm our “buy” recommendation with a TP of 40 sen per share based on discounted cash flow with weighted average cost of capital of 7.4%. Our TP implies an enticing 347% upside backed by an undemanding current price-earnings ratio of 9.5 times. — MIDF Research, July 13