This article first appeared in The Edge Malaysia Weekly, on May 2 - 8, 2016.
There seems to be renewed interest in Vivocom International Holdings Bhd. The stock saw some selling pressure in early February and fell to a low of 22.5 sen on Feb 22. However, in just over two months, it has surged 44% to close at 32.5 sen last Wednesday. The counter has more than tripled in the past year.
The two analysts tracking the stock have a “buy” recommendation, according to Bloomberg data. CIMB Research has a 67 sen target price while Mercury Securities sees the stock reaching 69 sen by end-2017. Mercury’s 48.5 sen end-2016 target price implies a 54% upside potential.
Vivocom should see a strong share performance over the next three months, on the back of multiple rerating catalysts, including a strong first quarter 2016 earnings release in May, CIMB Research analyst Marcus Chan says in an April 8 note.
In addition to the company’s projects in hand of RM1.2 billion (12 times its 2015 revenue), analysts expect it to clinch infrastructure contracts worth RM1.4 billion from CRCC Malaysia Bhd. The latter is a subsidiary of state-owned China Railway Construction Corp Ltd, which has amassed a whopping RM16 billion order book since its entry into Malaysia three years ago.
Vivocom currently trades at about five times analysts’ projected 2017 earnings, unjustifiably lower than the 12 to 21 times of its construction peers. The ACE Market-listed company intends to apply for a transfer to the Main Board in 2017 after it fulfils the profit requirements.
Aggressive investors who wish to gain exposure to the increasing Chinese foreign direct investment in Malaysia’s infrastructure projects can consider Vivocom’s three warrants, all of which have one-to-one conversion ratios and offer a lower cost of entry into the stock.
At their respective close last Wednesday, Vivocom-WC and Vivocom-WD were trading at zero premium to the underlying security. The former expires in January 2020 while the latter will expire in July 2020. Both have gained at least seven times from their 52-week low in August last year to reach as high as 24 sen last Monday.
Vivocom-WB, which has a 24 sen strike price, fetched a 20% premium over the underlying shares. It will expire in September 2018. Closing at 15 sen last Wednesday, the derivative is up 900% from its 52-week low of 1.5 sen in August last year.
Assuming the warrants trade at zero premium and the mother share reaches Mercury’s end-2016 target price of 48.5 sen, Vivocom-WC and Vivocom-WD — which have a strike price of 10 sen — should be worth 38.5 sen, up 71% from last Wednesday’s close of 22.5 sen.
In a similar vein, Vivocom-WB — which has a strike price of 24 sen — should be worth 25.5 sen, up 70% with a lower capital outlay from last Wednesday’s close of 15 sen.
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