KUALA LUMPUR: CIMB Equities Research has downgraded Salcon from Hold to Reduce in light of the weak set of 3Q17 results.
“Although we remain hopeful on the recovery of big water contract flows next year, the visibility of tenders over the next six months is poor, in our view,” it said on Thursday.
The research house rolled over its valuation basis to end-2018F and cut its target price to 43 sen from 48 sen, still based on an unchanged 60% discount to realised net asset value (RNAV).
Upside risks to its call are a resurgence in water contract flows and stronger-than-expected quarterly earnings.
CIMB Research said Salcon reported a 9M17 core net loss of RM3.7mil (after excluding unreleased forex losses and goodwill impairment) vs. our full-year net profit forecast of RM22mil.
The results were below expectations due to slower-than-expected progress billings and sustained losses by its property development division.
The 44.3% surge in joint venture profit (Langat 2 phase 1 and Langat STP projects) were key positives but insufficient to offset the losses incurred by other divisions.
In 9M17, all divisions reported operating losses except the 110 million litres per day (MLD) water concession in Vietnam.
The RM3.6mil operating loss incurred by its property development division was due mainly to the delayed profit recognition for the Res 280 Selayang project.
“We estimate this venture will book RM5mil to RM6mil net profit (Salcon’s share) in 4Q17F. The RM185,000 operating losses for construction was due to timing of new contracts, mitigated by the RM8.4mil share of JV profit from its ongoing Langat WTP and STP contracts.
“YTD, Salcon has secured RM44mil worth of water contracts related to the state of Selangor’s pipe replacement programme – package 8 (RM17.2mil), package 6 (RM13.2mil) and package 11A (RM13.3mil).
“This is positive but given the absence of other sizeable water contract tenders, we think the group is unlikely to meet our RM500mil job win forecast for FY17F.
“The group’s pipe replacement tenders are likely to be supported by the government’s RM1.4bil allocation for non-revenue water (NRW) contracts in 2018F,” it said.
CIMB Research said the ongoing Langat 2 WTP phase 1 job (RM994mil, 36% stake) is on track for completion by 2019F.
However, it is concerned about the possibility of further delays in phase 2 of the WTP contract, which we previously expected to be awarded by end-2017F.
“Our industry checks indicate that there is no urgency for the government to award phase 2 this year, given the ample capacity available in the medium term.
Outstanding order book of RM597mil at end-September 2017 remains the sole key earnings driver before earnings from property and VBT (new concessions) kick in in FY18F.
“In view of the weak results in 3Q17, we slash our FY17F EPS forecast by 109%, resulting in a slight net loss projection of RM2mil.
“We also cut FY18-19F EPS by 29%-39% to reflect slower progress billings and possible delays in big contract wins in 2018F,” it said.
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