Salcon's expertise is in wastewater treatment
KUALA LUMPUR: CIMB Equities Research has downgraded Salcon from Add to Hold with a lower target price of 67 sen compared with 82 sen earlier and it expects slower job win momentum for now.
The research house said on Tuesday although it continues to like Salcon for its niche water exposure, net cash position and earnings expansion from new ventures, the excitement from water plays is only likely to revive once the water deals in Selangor are concluded.
“We cut our target price as we apply a steeper reallised net asset value (RNAV) discount of 40%. Upside risks are stronger job flows and quarterly earnings. Downside risks are prolonged losses,” it said.
Commenting on the results, CIMB Research said Salcon reported a 1Q17 net loss of RM3.8mil vs its FY17F net profit forecast of RM22mil.
However, it deemed the results broadly in line as 1Q17 is typically a slow period for billings, which it expected to accelerate in the coming quarters.
The weak numbers were also exacerbated by the losses sustained by the property development segment due to higher cost and delays in recognising RM7m net profit from completion of Res 280.
“We expect the lump-sum property profit from completion of Res 280 to be recognised in 3Q17,” it said.
CIMB Research said while there could be a slight improvement in 2Q17F earnings, it expects 2H17F net profit to be strong.
Apart from the recognition of the c.RM7mil profit from the Res 280 property development project in 3Q17F, the research house expects a RM2.3mil writeback for marketing expenses related to the South Yarra property project in Australia, as the group has signed a deal to sell an 80% stake in the project to Eco World International (EWI). Salcon will eventually own a 20% stake in the RM728mil GDV project.
“Management’s 20-30% success rate target for the RM1.5bil total domestic water infra tenders is intact, suggesting potential total wins of up to RM450mil, vs. our unchanged RM500mil wins forecast for 2017F. Our forecast 2017F can be considered conservative if we take into account the group’s prospects of securing the RM800mil Langat 2 phase 2 water transfer project WTP in Selangor, which is potentially a big-ticket contract for Salcon in 2H17F.
“If this materialises, outstanding order book of RM645mil could more than double by end-2017F.
“The postponement of the Selangor water deals to the new Oct 2017F deadline could spell delays in major water tenders in the state. This may negatively affect the timing of phase 2 of the Langat 2 WTP, in our view.
“Nevertheless, we continue to expect Salcon to be the frontrunner for phase two of the Langat 2 WTP, given its current role in phase 1.
“Based on our checks, the tenders for Langat 2 phase 2 are still ongoing but with no clear indication of the award timeline yet,” it said.
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