• Share price rebounded from 2-month low amid active share buyback. Following a dismal 1Q16 results (net loss RM20m) on 26 May, Salcon’s share prices slid 10.2% from RM0. 635 to a low of RM0.57 on 31 May before gradually recouping the losses to end at RM0.605 yesterday, mainly supported by active share buyback amounted 11.6m shares , accounted for 33% of total volume done from 27 May to 20 July.

• Better 2Q16. We believe the persistent share buyback measures outline confidence of Salcon’s prospects. Management guided that 1Q16 could be the bottom and earnings is set to turnaround in 2Q16 in anticipation of a robust profit in 2Q16 results on the back of progress billings and an estimated ~RM40m net gain from the divestment of China water assets coupled with the impact from potential forex gains due to the recent weakening of the RM.

• Salcon is currently bidding a total tender book over RM2.2bn, with approximately 80% from domestic and 20% overseas. Management is targeting a 20-30% success rate (RM400m-600m worth of new wins) in view of the RM12bn budget allocated for water and wastewater projects under the 11MP.

• Further downfall cushioned by cheap P/B and expanded warchest coupled with attractive dividend yield. At RM0.605, Salcon’s P/B of 0.76x remains undemanding (25% below its average peer’s 1x and 31% discount against its historical 10-year average 1.1x), supported by attractive dividend yield of 5% (industry 4.2%) and huge netcash per share of RM0.295. To recap, the completion of the disposal will see

• Salcon’s netcash to soar to ~RM200m from RM162m end Mar 16, translating into netcash/share of RM 0.295, equivalent 48% of the current share price.

• Poised for a triangle breakout to revisit RM0.66-0.75 zones. Following a 2-month range bound consolidation within RM0.57-0.615 (200-d SMA) band, we believe Salcon is ripe again to launch another wave of uptrend to stage a triangle in the short to medium term, supported by the golden cross in MACD and uptick in weekly oscillators.

• A decisive breakout above RM0.615 could take the next leg up towards RM0.645 (38.2% FR), RM0.66 (200-w SMA) and LT objective at RM0.75 (50% FR) levels. On the flip side, key supports are RM0.59 (10-d SMA), RM0.57 and RM0.545 (1 Mar low).

Source: Hong Leong Investment Bank Research - 21 Jul 2016