Salcon Bhd
(Nov 10, 80 sen)
Buy at 81.5 sen with a target price of 93 sen: Salcon’s share price surge on Tuesday took us by surprise as it chalked up a gain of 11.6% in a single day. Although the details are still sketchy, we gather from the grapevine that there is a possible corporate exercise in store.
Speculation aside, we value Salcon based on its prospects of securing more water-related projects next year. However, we do not discount the risk of a slowdown or delay in government contract awards derailing our earnings expectations. Our FY11 construction revenue forecast for Salcon is flat in annual terms but its full-year revenue should be supported by growth from its China concession division which should see earnings double next year.
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Salcon said its wholly-owned subsidiary Salcon Engineering Bhd had on Nov 8 accepted a letter of award from Air Kelantan Sdn Bhd for the refurbishment and upgrading of water treatment plants and reservoirs in Kelantan.
The RM52.5 million contract is to be completed in 20 months. However, we are not making any changes to our earnings estimates as the amount secured is still within our 2011 order book assumption.
Nevertheless, we raise our target price to 93 sen from 85 sen previously, as our sum-of-parts fair value for the construction portion is now pegged to its FY11 numbers at a price-to-earnings ratio of nine times.
The water concession discounted cash flow value is maintained at 48 sen.
Assuming 60% of the contract value will be recognised as revenue in 2011 and the remainder in 2012, the amount secured still falls within our order book replenishment assumption (FY11 at RM150 million ).
Thus, we are not adjusting our construction earnings projection for FY11. — OSK Research, Nov 10
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