Why I Like SALCON

This company has had a bad reputation for some time. Things have been changing and evolving. Salcon saw a change in major shareholders in 2005 after Naga Muhibbah, under Datuk Seri Goh Eng Toon (former Ban Hin Lee CEO) acquired a majority stake from Kumpulan Emas Bhd in several off-market transactions. Since then, management has sought to clean up its business. In 2007, Salcon pared down its stake in PalmTech to 49%, a cumbersome legacy problem.

However, corporate governance issues arose when the Group decided to acquire a stake in Oriental Capital Assurance. This decision was however voted down by its major shareholders. Management has assured that there are currently no plans to acquire any insurance businesses in the near to immediate future.

Salcon’s CEO Mr How See Hock joined the Group a few years ago after spending almost 20 years with IJM. Its Finance Director, Mr Law Woo Hock joined from Ireka Corporation.

Market Capitalisation : RM260MN
Net Gearing (as at 30 June 2009) : Net Cash
NTA (as at 30 June 2009) : RM0.65

Salcon’s water projects range from construction of water treatment plants to being a holder of foreign water concessions. Previously active in the construction of domestic water treatment plants and wastewater treatment centres, the company has in recent years expanded to China, Thailand, Indonesia and Vietnam. Salcon’s water related projects encompass water and wastewater turnkey investment (design, finance and construct), turnkey contracting and water asset management (O&M, NRW Control). As of FY08, its water and wastewater related earnings accounted for 95% of revenue.

Catalyst #1: New management have worked hard to turn around the image and instill professionalism operational measure. Smaller in size than Hyflux (Singapore) but trades at significant discount 10x FY10 for Salcon, almost 50% discount compared to 20x FY10 for Hyflux. Salcon's P/Book is just 0.9x while Hyflux is at 4x. Orderbook to market cap is also attractive at 6x (RM1.5b/250m) and the company is net cash.

Catalyst #2: Earnings have been on a recovery trend and growing sequentially. It is one of those stocks that have been largely ignored owing to "mis-management" in the past. New management have been working hard to rectify that. The comparison with Hyflux is not to say Salcon should be valued the same as Hyflux, but rather the disparity and gap is indicative of the "lack of following". I like these kind of stocks a lot, more and more professionals will discover the stock.

Salcon’s orderbook as of August 2009 is RM1.2BN out of which RM606mn is unbilled and expected to last 1.5 years. For the unbilled portion, around 70% are domestic based projects (Kelantan, Seremban, Sandakan non-revenue water (NRW) projects and sewerage treatment plant in Medini, Iskandar) while the balance of 30% are mainly from Vietnam and Sri Lanka. With regards to their Medini sewerage treatment plant, mgmt indicated that the contract value will likely be revised up by roughly 20% from RM94mn as the client is keen to bump up the population requirement from 400k presently to 500k

Separately, mgmt is currently tendering for more than RM1.5bn worth of new jobs. Several of these include Phase 2 of a sewerage project in Kota Kinabalu as well as new construction and O&M opportunities in India. In India, mgmt was notably upbeat stating that the country is in dire need of water infrastructure projects and the one which they are currently tendering for is quite sizable at 700MLD. Salcon is tendering together with local partner and only for construction where margins are lower. Salcon to handle the engineering, process and M&E portions while its local JV partner will do the structural and concrete portion so that capital outlay will not be so large. Salcon has also set up office in Indonesia 2 years ago but no projects yet due to the political situation there. As Salcon has no construction license in Indonesia, it will undertake construction with local partners

Salcon operates a total of 6 water concessions in China and 1 in Vietnam:

Projects	Location	Capacity	Concession period
Changle Water Treatment Plant	Shandong, China	100 MLD	50 yrs
Changle Sewage Treatment Plant	Shandong, China	20 - 40 MLD	50 yrs
Changle Raw water Transfer Project	Shandong, China	100 MLD	30 yrs
Nan An Raw Water Supply Project	Fujian, China	Phase 1 - 170 MLD	30 yrs
		Phase 2 - 175 MLD
Haining Water Treatment Plant	Zhejiang, China	Phase 1 - 150 MLD	30 yrs
		Phase 2 - 150 MLD
Linyi Water Treatment Plant	Shandong, China	150 MLD	30 yrs
Binh An Water Supply Scheme	HCMC, Vietnam	100 MLD	20 yrs

Source: Company

Catalyst #3: Salcon is now emerging as new stock picks by the bigger houses. It used to have only OSK and Affin following the stock. Credit Suisse have been following the stock for the past 2 years, but were caught by the 2008 downturn. They should easily pick up on Salcon as a new buy soon.

Catalyst #4: Asia water plays are few and many do not get the size needed, hence Hyflux has been the stellar stock. Salcon is now emerging from the doldrums. Considering it ook control in 2006, but had to push through the difficult 2008 period, it is coming out of the crisis nicely intact. No debt, cash positive. The gap between Hyflux and Salcon should narrow considerably. Very comfortable with my anticipated 30% upside.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

p/s photos: Susu