By CIMB Research
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Target price: RM1.28
AWC views the valuation of the acquisition of a 60% stake in Trackworks and Supplies Sdn Bhd at eight times calendar year 2018 price-earnings multiple, based on profit guarantees of RM8mil in financial year 2018 (FY18) and RM12mil in FY19 (September year-end), as fair.
Besides taking into account the two-year profit guarantee, Trackworks’ valuations were determined based on its strong earnings track record and established background in rail-related works.
The deal also features a put-call option, valid for a period of five years upon the completion of the transaction, allowing AWC to acquire the remaining 40% stake it does not own.
CIMB Research gathered that Trackworks’ current orderbook stood at RM120mil over the next two years.
This consists mainly of supply, installation and commissioning of various track materials and track-related machineries.
Trackworks also has a tenderbook amounting to RM600mil and it is confident it can achieve a conservative hit rate of 10%.
Trackworks has worked with many reputable names in the rail industry, such as Prasarana, MRT, KTM, and Express Rail Link.
AWC also highlighted plans to use Trackworks as a platform to venture into rail asset management.
Using UK’s rail network as a model, AWC plans to introduce rail asset management programmes by working with rail asset owners and the Malaysian government.
This will be based on either a concession model or contract basis.
With more than RM150bil worth of rail projects in the nation’s pipeline, AWC is targeting to manage RM1.5bil worth of rail assets, in particular rail tracks.
“Based on our back-of-the-envelope calculations, this acquisition could increase AWC’s FY18 to FY20 earnings per share by 3.7% to 30.4%.
“However, we are not incorporating potential earnings accretion into our estimates pending the completion of the transaction.
“Downside risks to our view include the unexpected cessation of awarded contracts and termination of this proposed acquisition,” said CIMB Research.
SCICOM (MSC) BHD
By Affin Hwang Capital
Target price: RM2.93
Scicom recently secured a project from Cambodia’s Tourism Ministry to develop, implement, operate and maintain a fully integrated Cambodia Tourism Management System.
The revenue from this contract hinges on the number of air travellers to and from Cambodia.
The project gives Scicom an exposure to the fast-growing Cambodia tourism market, which in 2016, had 2.7 million international tourist arrivals by air and US$3.2bil worth of total tourism receipts.
Assuming a fee of US$1 per international tourist per flight, which is payable to Scicom, and earnings before interest, taxes, depreciation and amortisation (Ebitda) margins of 45%, the project should contribute RM12mil to RM16mil of net profit in FY19 to FY20, making an estimated 22% to 27% of the group’s net profit.
Scicom’s share price has declined by 15% year-on-year, attributable to weaker six-month FY18 net profit, due to lower revenue and strengthening of the ringgit and the long lull since the last major contract win in 2013.
Moving into the first half of calendar year 2018 (H1CY18), Affin Hwang Capital expects an increase in Education Malaysia Global Services (EMGS) fee collection of 20% to mitigate the impact from a lower number of foreign student applications.
“Elsewhere, we expect its business process outsourcing (BPO) business volume to stablise, before recovering in the H2CY18.
“However, the higher second half FY18 pretax profit would be offset by normalisation of tax rate to more than 20%, from 10% in the first half of FY18,” said Affin Hwang Capital.
The research house likes Scicom for its expertise in the e-government services or e-solution segment, high return on equity (ROE) business model with 42% in FY17, FY17 to FY20 earnings compound annual growth rate (CAGR) of 10%, strong balance sheet (net cash) as well as attractive valuation of 13 times FY19 price-earnings ratio and 5% dividend yield.
The Cambodia Tourism project is a major earnings catalyst for the group.
BIMB HOLDINGS BHD
By AllianceDBS Research
Target price: RM5.00
BIMB has an arsenal of tools to lean on to weather the current soft operating environment.
The bank has a niche in Islamic banking, which supports financing growth momentum, high current account, savings account (CASA) ratio and liquid balance sheet to stave off net interest margin (NIM) compression as well as high financing loss coverage, to buffer against potential deterioration in asset quality.
For FY18, BIMB continues to target to deliver financing growth above industry levels, hopes to keep NIM stable (albeit there are pressures), moderate expense trends, stabilise credit cost and financing-to-deposit ratio, and more importantly, to remain well capitalised.
Separately, BIMB remains relatively unscathed with the MFRS9 implementation with an expected 30 basis points impact to capital on Day 1 of adoption.
Prospective credit cost should remain relatively low at 20 basis points given its asset quality position.
AllianceDBS Research believes the market is not assigning sufficient premium for a franchise delivering return on equity (ROEs) of about 14% and better-than-industry metrics.
“While we are among the many buy ratings in the market, our earnings forecasts are above consensus.
“Where we could differ would be our views on BIMB’s financing growth and credit costs, which are more positive,” said AllianceDBS Research.
The research house believes BIMB’s valuations are unduly unappreciated given its robust financial metrics.
Where it may fall short is the liquidity of its stock given the high and tight shareholdings of its major shareholders.
BIMB could prove skeptics wrong if its financing growth is sustained above industry.
“Our RM5 target price is derived from the Gordon Growth Model, assuming 14% ROE, 3% long-term growth and 10% cost of equity, and implies 1.7 times FY18 book value.
“We believe its current valuation presents a good opportunity to gain an inexpensive entry into a solid Islamic banking franchise,” added AllianceDBS Research.