Thursday, April 30, 2015

'Like' - Salcon (Cash-Rich, Better Earnings In FY2015) ...

It is sitting pretty with a lot of cash in hand, a sizeable order book, valuable land bank and new growth opportunities from a broadband-type business.

The water and wastewater engineering company, which began diversifying into property development two years ago (2013), is touted as one of the few Malaysian companies to have made a significant amount of money by divesting a business in China.

In September 2013, Salcon announced the disposal of its entire interest in six companies involved in water and wastewater concessions in China to Hong Kong-listed Beijing Enterprises Water Group Ltd for 955 million yuan or RM518.3mil.

As a result of the divestment, Salcon has improved its balance sheet to a cash position of RM301.65mil as at financial year ended Dec 31, 2014. Its cash position could improve by another RM40mil after the sale of the final concession is completed.

The company’s debt, meanwhile, has declined from over RM300mil to RM99mil as most of its borrowings were tied to the concessions in China.

On how the company would use its cash, it would be for expansion into its newly established property development and investments in new income stream.

Even with the sale of its China assets. Salcon has a decent track record of water projects with a RM1.11bil order book as at December 2014. Out of this, RM696mil is still unbilled. Currently (April 2015), 96% of the company’s total order book comprises domestic jobs while the balance is overseas, mainly sewerage and water-related.

In the past, the group has participated in several major water infrastructure works, such as the 2,000 million litres per day (MLD) Sg. Selangor Phase 1 and 2 (SSP 1 & 2), sewerage treatment plants in Medini, Iskandar, and Sabah and water supply projects in Sri Lanka and Vietnam on a turnkey basis. Besides Sri Lanka and Vietnam, Salcon also has presence in Thailand and India.

It had secured the RM993.88mil Langat 2 Water Treatment Plant project with joint venture partners, MMC Corp Bhd and Ahmad Zaki Resources Bhd, in April 2014. Its portion of work estimated at RM358mil. Works on the project has started and the packages of site clearing and earthworks jobs have been awarded.

As Salcon is involved in the mechanical and engineering (M&E) portion of the project, contribution from this would kick in financial year 2015 onwards. Estimate that Salcon’s package of Langat 2 should yield at least a 10% pre-tax margin.

In Dec 2014, Salcon secured the Langat centralised sewage treatment plant worth RM470mil through a joint venture with Loh & Loh Construction Sdn Bhd.

Salcon is tendering for RM2.2bil worth of new projects in Malaysia and overseas and the success rate of converting bids into its order book was estimated at 25% to 30%.

Salcon is a new player in the property scene. Its first property project is located in Selayang called Selayang Res 280 that has an estimated gross development value (GDV) of RM155mil. The project features a 21-storey commercial building comprising 12 units of 2-storey shop office and 280 units of small office home office or SOHO. Since its official launch in Oct 2013, response has been encouraging with 72% of the total units sold. Construction of the project started since the fourth quarter of FY2013 and slated for completion in 2016.

Salcon is also seeking other mergers and acquisitions or partnerships in the property sector. For example, Salcon’s 50%-owned subsidiary, Nusantara Megajuta Sdn Bhd is looking to collaborate with Eco World Development Group Bhd to develop a township project located within Iskandar Malaysia, Johor.

The proposed 12.5-acre mix development project is expected to be launched in 2015. Earnings stream from this project in the next two to three years from April 2015 would offset Salcon’s lumpy construction and infra earnings.

There could be more opportunities for Salcon to undertake niche property projects with the fast-rising Eco World.

Salcon’s latest property venture is Belfield Crest in Jalan Belfield, Kuala Lumpur, which is also being undertaken via a joint venture. Salcon has a 70% stake in Prestasi Kemas Sdn Bhd that is developing the mixed-use development project. Jalan Belfield is situated within the Kampung Attap area which is being touted as the city’s new growth centre. Belfield will come up opposite the proposed Menara Warisan Merdeka undertaken by Permodalan Nasional Bhd.

With Salcon’s divestment out of China, it is expected to report better earnings in FY2015 due to the higher progress billings of its construction and property projects.

In the fourth quarter of FY2014, the company had posted a pre-tax profit of RM7.49mil following a turn-around of its construction division, which had been loss-making since FY13. For the full year, pre-profit came in at RM1.6mil as compared to a loss of RM30.75mil in 2013, while revenue was higher 22.7% year-on-year to RM201.9mil.

The bulk of Salcon’s revenue now (April 2015) comes from the construction division at 91%, but this will be lower once contributions from its property and technology segments gain traction. The new businesses would bring in better margins and more consistent cash flows.

Salcon’s major shareholder is Datuk Seri Dr Goh Eng Toon who is chairman. His interest is mainly held via his private vehicle, Naga Muhibah Sdn Bhd. The other substantial shareholders are deputy chairman, Tan Sri Tee Tiam Lee and Great Eastern Holdings Ltd.

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Please note that all data given are merely blogger's opinion. It is strongly recommended that you do your own analysis and research before investing.