OSK says Salcon shares undervalued

Tags: Brokers Call | OSK Research | Salcon Bhd | Undervalued

Written by Financial Daily

Friday, 25 September 2009 11:17

SHARES of SALCON BHD [], a water infrastructure builder and concessionaire, are deemed undervalued, considering that the stock is trading below its book value (BV) against a backdrop of the firm’s earnings potential, according to OSK Research.

In a note yesterday, OSK said the valuation for Salcon, an unrated stock, based on a one-time BV or net assets per share, would point to a fair value of 62 sen. This represents a 21.6% premium to the stock’s closing price of 51 sen yesterday.

Salcon’s net assets per share stood at 65 sen as at June, up from 62 sen at the end of last year.

“In the past five years, Salcon’s earnings have been choppy following a change in management, which has implemented a restructuring exercise. For that, we think a PER (price-to-earnings ratio) method would be difficult to ascertain Salcon’s value.

“As net earnings will grow twofold this year on a year-on-year basis, we see Salcon’s net earnings hitting

RM23.2 million by year-end. This figure will be on the back of higher billings momentum from its China CONSTRUCTION [] projects and better contribution from its concession division,” OSK said.

Salcon’s net profit in the financial year 2009’s second quarter ended June (2QFY09) surged 74.2% to RM6.41 million from RM3.68 million a year earlier, helped by the firm’s construction business and water concessions in China. Revenue climbed 80.3% to RM111.65 million from RM61.94 million.

In FY08, Salcon raked in a net profit of RM8.79 million from a net loss of RM7.84 million a year earlier on the back of RM252.82 million revenue.

Salcon is expanding its business. The firm is expected to secure more construction jobs under the Ninth Malaysia Plan where policymakers have earmarked RM8.1 billion to improve 219 water infrastructures, besides another RM3 billion for 11 new wastewater facilities and 47 ongoing projects.

On a global scale, Salcon has tendered for some RM1.5 billion worth of construction projects, of which domestic jobs make up 60%.

Based on the company’s historical success rate of between 20% and 30%, the builder is expected to clinch between RM300 million and RM450 million worth of jobs towards FY10, at an estimated net profit margin yield of between 7% and 8%, OSK said.

Salcon’s water concession business is also a growth story in anticipation that the company, already with seven concessions in hand, will secure more water and wastewater deals in China, possibly on a build, operate and transfer basis.

Of the seven concessions, six are in China where these deals are operated at subsidiary level, while the remaining one in Vietnam is run via an associate stake.

This article appeared in The Edge Financial Daily, September 25, 2009.

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Last Updated on Friday, 25 September 2009 11:19

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