Salcon among biggest proxies for water infra play

Pahang-Selangor raw water transfer tunnel project at Langat 2 Water Treatment Plant (File pic)

KUALA LUMPUR: CIMB Equities Research is retaining its Add for Salcon which is one of the biggest proxies for water infra play under its coverage.

It said on Friday Salcon reported a core loss in 1Q16 (excluding forex losses) against its and consensus full-year net profit forecasts. The slump in numbers was not a surprise.

“The results are deemed in line as we expect 2Q16 to be a blowout quarter due to gains from China assets divestment and a surge in progress billings.

“The 2H16 success rate for water infra job wins remains strong. Key catalysts intact,” it said as it described the 1Q16 core losses as not representative of full year.

CIMB Research said billings for the Langat 2 water treatment plant (WTP) were still at an early milestone as at end-1Q16. The 1Q16 net cash stood at a healthy RM163mil (US$44.5mil) or 25 sen a share or 38% of market cap.

While there were no major surprises in overall operating indicators in 1Q16, the research house  expects Salcon to strongly return to profitability on the back of progress billings and an estimated RM30mil to RM35mil net gain from the divestment of China water assets. 

It pointed out the impact from potential forex gains due to the recent weakening of the RM could also further boost bottomline. Management guided that the operating losses from property development are bound to turn around in 2H16, backed the Res280 project in Selayang.

It added Salcon’s outstanding construction order book of c.RM600m (US$146m) is healthy, with over 80% comprising the Langat 2 WTP and Langat sewerage plant. The group’s order pipeline stood at RM2.4bil (US$585mil). 

A likely 20% success rate implies potential new wins worth RM500mil, which translates to 85% order book growth by end-2016.

The formation of a new water master plan at the Federal Government level in late April and RM2bil potential water infra contracts under the 11th Malaysia Plan are key sector drivers.

“Our FY16-18 EPS forecasts are unchanged. We continue to expect FY16 to be a turnaround year. Our RM18m FY16 net profit forecast assumes strong construction billings and maiden profit from VBT, based on two existing contracts secured with two local telco operators which make up 20% of EPS. 

“However, our forecast does not impute the recently secured Metro-E contract with Celcom and other potential new recurring income streams in 2016/17,”  it said.

CIMB Research said Salcon is still the only listed proxy under our coverage for the recovery in water infrastructure backlog. 

It noted that a revival of this theme looks more likely in 2H16. Historically, share prices of companies with exposure to water restructuring and infra typically move in tandem with the water sector newsflow. 

“Target price remains pegged to a 40% RNAV discount. Add maintained. Salcon’s FY16-17F dividend yield of 5%-6% is attractive too. Potential downside risk is a delay in the water contract beyond 2016,” it said.