Salcon in China, UK deals
SALCON BHD By Affin Investment Bank Add (maintained) Target price 60 sen
OUTCOMES of recent bids for water– related construction jobs have been challenging. Jobs have either been delayed due to funding issues, partitioned into smaller contracts of less than Rm10mil each or have margins squeezed sharply lower due to intense competition. As a result, there has been no new contract wins so far in the year
Notwithstanding the void of new contracts, management remains hopeful and has a tender book of about Rm3.4bil, comprising Rm1.8bil in Malaysia and Rm1.6bil overseas. As at Dec 31, 2011, Salcon has an outstanding order book of only Rm243mil, which is just one-time financial year ended Dec 31, 2011 (FY11) construction revenue.
Securing new concessions has become more competitive in China but we understand the group is now close to completing the acquisition of two smaller concessions. The group will also focus more on industrial waste treatment concessions that provide higher returns.
Salcon is still exploring options on the listing of its Chinese concessions, including merger with other concessionaires to significantly expand the capacity of the vehicle to be listed. Listing on the Shanghai Stock Exchange is preferred as the concession assets are expected to fetch higher price to earnings ratios.
The group is also into solar energy in the United Kingdom and based on guaranteed quarterly payments over 25 years and 2,800 homes to be installed by end-march 2012, management estimates an internal rate of return of about 14% from the project. In transportation, the group now operates a fleet of new coaches, vans and support vehicles to ferry workers for an electronic multinational corporation in Penang. This Rm20mil venture is expected to generate operating profits of Rm3mil to Rm4mil in its full-year operations.
We maintain our FY12 to FY13 net profit forecasts, pending progress reports on the performance by the new ventures in the coming quarters and new contract wins. The private placement exercise has minimal impact on our revised net asset value of RM0.71 per share. In our view, Salcon is still an undervalued asset play. Based on our target price of RM0.60, add call is maintained. CB INDUSTRIAL PRODUCT HOLDINGS BHD By Hwangdbs Vickers Research Buy (maintained) Target price RM3 Unbilled sales stood at Rm371mil as of Dec 31, 2011 (FY11) with strong prospects for more order wins. Demand for Modipalm mills has improved steadily with the mill capable of producing at higher oil extraction rates for clients.
The group is also expanding capacity to 20 to 24 mills by end-2013 (current capacity at 12-14 mills/year) via its factory in Klang. There is upside to engineering margins resulting from increasing focus on mechanical projects that yield higher margins and outsourcing of lower margin civil works of the mill. Earnings growth from its engineering division should partially offset lower plantation profits in FY12 after the sale of Sachiew and Empresa estates.
Upon completion of the sale of Sachiew and Empresa plantations, we estimate CBIP to have Rm235.6mil net cash (RM0.86 per share). It is in a strong position to declare a special dividend, and will with ample cash for new acquisitions. The group recently acquired some 32,000ha in central Kalimantan, which is expected to be fully planted in six years at the rate of 6,000 to 7,000ha and Rm60mil capex per year.
We have changed our valuation metric to PE (previously sum-ofparts) after the disposal of its plantations.
We derive a higher target price of RM3 (from RM2.35, adjusted for bonus issue) pegged to 10 times FY12’S forecast earnings per share of 30 sen. With its strong balance sheet, high return on equity of 21%, 21% net margin, we consider current valuations at seven times forward earnings attractive. DIALOG GROUP BHD By Hong Leong Investment Bank Research Neutral Target price RM2.27 Dialog remains a good long-term investment proxy to the bullish oil and gas sector, given its strong earnings compound annual growth rate (financial year ended June 30, 2010 to FY14) of 23%, capitalising on the Rm60bil Petronas Refinery and Petrochemicals Integrated Development project.
From 52-week low of RM1.63 on Sept 23, 2011, Dialog surged 55% to as high as RM2.52 on Jan 31.
Due to profit-taking correction, share prices tumbled 11% from the high to as low as RM2.24 on March 15 before closing at RM2.27 yesterday.
There could be more downside in the immediate term as Dialog is still trading below the 200-day simple moving average or SMA (RM2.32) and weekly Bollinger band (RM2.35). Current uptrend rally from Sep 11 will be negated if the double-top formation materialises, for example, violating the crucial neckline support near RM2 (also the uptrend line channel).
However, we believe the chances are small given that the daily indicators are gradually on the mend while the weekly slow stochastic reading is fast approaching oversold position.
We are neutral at current price but will turn more positive and advocate a trading buy if share prices dip further towards immediate support at RM2.14 (weekly low Bollinger band) for technical rebound targets at RM2.35, RM2.42 (50-d SMA) and RM2.55 (weekly upper Bollinger band).