Salcon profit expected to improve significantly in second half

PETALING JAYA: Salcon Bhd, a diversified water and wastewater engineering company, is expected to post a strong earnings improvement in the second half of this year, supported by contributions from the company’s construction business, according to CIMB Research.

“We expect a strong earnings turnaround in the second half (H2’17), underpinned by strong construction billings, completion of a property development project, and marketing cost savings,” the research house said in a report.

CIMB said Salcon’s earnings would be supported by property development profit recognition from Res 280 in Selayang. The development with a total gross development value (GDV) of RM160mil and at a 15% net margin and 50% stake implied a profit of RM8mil to RM9mil.

It added that earnings would also be supported by the reversal or write back of RM4mil to RM5mil marketing cost from its Yarra One property development project in Melbourne, Australia (GDV of RM728mil).

Furthermore, the sale of a 80% stake in this project to Ecoworld International has been completed. Salcon posted a net loss of RM9.04mil in the second quarter ended June 30 against a net profit of RM27.9mil last year. Its revenue for the quarter fell marginally to RM21.5mil against RM21.7mil a year ago. In the first six months, Salcon posted a net loss of RM12.8mil on revenue of RM40.9mil.

“We consider the performance to be broadly in line as we expect an earnings turnaround in H2’17 forecast, driven by infra and properties. We expect stronger construction billings in H2’17F on top of a property margin recovery in Q3’17F due to the completion of a project,” CIMB said, adding that weak property earnings and slow construction billings were the main reasons for the core losses in H1’17.

Results aside, CIMB said Salcon’s job tender outlook for the rest of financial year ending Dec 31, 2017 remained unexciting. Given that new sizeable water treatment plant (WTP) projects have been awarded (including the Labuhan Dagang 400 MLD WTP in Selangor), Salcon will be vying for small non-revenue water (NRW) contracts.

“We understand that it is targeting contract sizes of RM10mil-RM20mil each. There are roughly 50 NRW contracts up for grabs in Selangor, of which 30 have been tendered out and some others pending awards by end2017,” CIMB said.

It noted that there was a possible delays of phase 2 of the WTP contract, which CIMB had earlier expected to be awarded by end-2017.

Indications from its industry checks suggested that there was likely no immediate need for the Government to award phase 2 this year given the ample capacity in the medium term, according to the research house.