SALC  is  a  water  and wastewater  engineering  leader  in  Malaysia.  Post disposal of  its proposed  China  water assets,  we see the possibility of potential  dividend  surprises  as  the  company  will  end  up  with  an estimated  MYR300m  net  cash.  We  also  see  value  in  its  venture  into property  development  with  EcoWorld  as  one  of  its  joint-venture partners. The stock is NOT-RATED, with our FV at MYR0.80.

• More  water  jobs  likely.  We  believe  SALC  stands  a  good  chance  of bagging  more  water-related  construction  contracts.  The  group,  whose tenderbook currently  totals MYR2.25bn, is jointly bidding for construction works on  the MYR1bn  Langat 2 water treatment plant  with MMC  (MMC MK, NR)  and Ahmad Zaki  (AZR MK, BUY; FV MYR1.47)  as well as  the MYR800m water treatment plant in Pengerang, Johor,  with George Kent (GKEN MK, NR).
• Property  potential re-rating catalyst.  SALC  recently ventured into its maiden property development  project.  The company is in  a 50:50 joint venture  (JV)  with Azitin Venture SB to develop its  first  property project  -RES  280  soho  development  in  Selayang,  with  a  GDV  of  MYR160m. Moving forward, the group  is looking to  partner  EcoWorld Development SB  to  launch  a  mixed  development  project  with  GDV  of  MYR1.2bn  in Johor Bahru come 2H2014. Given that SALC’s major shareholder, Datuk Eddy Chong, who  has an effective stake of 15% in SALC, also holds a minority  stake  in  EcoWorld,  we  see  the  two  companies  collaborating further in future developments.  
• Likely  dividend  surprises.  After  completing  its  proposed  disposal  of water assets in China by end-2013, management  has guided that SALC would be sitting on total cash pile of MYR300m, and minimal borrowings. We foresee the possibility of  a  potential dividend surprise to reward its existing  shareholders.  Assuming  SALC  pays  out  20%  of its  total  cash, this would translate into a hefty special DPS of 10 sen.
• Risks.  Potential  delay  in  the  award  of  water-related  contracts  by  the relevant  authorities  may  increase  downside  risk  to  SALC’s  earnings projection.

Looking Good

Brief introduction. SALC is the leading water and wastewater engineering company in Malaysia, offering full range of services from design, construction, commissioning, operation  to  maintenance  of  treatment  plants  and  ancillary  facilities.  Since  its inception  in  April  1974,  the  group  has  completed  500  water  treatment  and  300 wastewater projects in Malaysia, Thailand, Vietnam and China.

Business model.  SALC is in the midst of disposing all its assets and operations in China  to  Beijing  Enterprises  Water  Group  Ltd  for  total  cash  consideration  of MYR518.3m. Post the completion of this exercise by Dec 2013,  SALC  would focus on two core business divisions namely:
i)  Construction of  water and wastewater  treatment plants: Existing orderbook stands at MYR320m to be carried out over the next 18-24 months.

ii)  Property  development:  The  group  has  recently  ventured  into  its  maiden property development foray. Of note, it has formed a 50:50  JV  with Azitin Venture  SB  to  develop  its  maiden  property  project,  i.e.  RES  280  SOHO development  in  Selayang  with  total  GDV  of  MYR160m.  Launched  in  Oct 2013,  we  understand  that  the  take-up  rate  for  this said  project  has  so  far been encouraging at over 70%.

More water jobs in the country likely.  On its existing water segment, we believe SALC  stands a good chance to bag more contracts. Its tenderbook currently stands at MYR2.25bn. Of note, the group is jointly bidding for the construction of Langat 2 water treatment plant worth MYR1bn with MMC (NR) and Ahmad Zaki. Management guided that SALC holds an effective interest of 36% in the consortium. Also in the pipeline includes the MYR800m water treatment plant in  Refinery and Petrochemical Integrated  Development  (RAPID)  Pengerang,  which  management  has  formed  a 50:50  JV  with George Kent (NR) to  submit a joint bid. On top of that, we gathered from sources that SALC is looking to participate in the tender for the provision of solid and  industrial  waste  management  in  RAPID  Pengerang.  This  contract  alone  could worth some MYR400-500m.

Property  potential  re-rating  catalyst.  SALC  is  also  looking  to  launch  a  mixed development project in Johor Bahru come 2H2014. Total GDV of this development is estimated at MYR1.2bn on a 12.5-acre land in Larkin, Johor Bahru. We understand that  SALC  is looking  to  partner  EcoWorld’s  Nusantara  Megajuta  SB  at a  50:50  JV arrangement.  The  development  comprises  of  retail  outlets,  serviced  residences  as well  as  strata  shop-cum-apartments.  We  believe  having  EcoWorld  as  its  partner would help to establish its branding in the property segment while at the same time accelerate its learning curve in the near term. Given that SALC’s major shareholder Datuk  Eddy  Chong,  which  has  an  effective  stake  of  15%  in  SALC,  also  holds  a minority  stake  in  EcoWorld,  we  foresee  the  duos  collaborating  further  in  future developments.

Likely  dividend  surprises.  Post  the  completion  of  its  proposed  disposal  of  water assets in China by end-2013, management guided that SALC would sit on total cash pile  of  MYR300m  with  minimal  borrowings.  We  foresee  the  possibility  of  potential dividend surprises to reward its existing shareholders. Assuming SALC pays out 20% of its total cash pile, that would translate into a hefty special DPS of 10 sen, which we believe  would  help  to  re-rate  its  share  price.  We  believe  there  could  be  more concrete indications on the quantum of the potential special DPS come its  EGM to vote for the proposed China assets disposals, which is currently scheduled to take place in mid-Nov.

Earnings  projection.  Pegging  a  30%  strike  rate  to  its  outstanding  tenderbook  of MYR2.25bn, we expect  SALC to secure new orders of MYR550m over the next two years.  This  we  believe  would  help  to  boost  its  earnings  growth,  which  we  are forecasting  at  118.7%/22.9%/82.8% for FY13F/14F/15F.  On its property division, we have factored in earnings contribution from its  RES 280 development  come FY14F. This we believe would help  to offset SALC’s loss of income after its proposed water assets disposal in China. On a side note, its proposed MYR1.2bn mixed development project, which will be equity-accounted, has yet to be captured into our model.

Valuation.  Based  on  our  SOP  valuation,  which  comprises  of  i)  SALC’s  sturdy  net cash  pile  of  MYR300m  post  proposed  disposal  of  its  water  assets  in  China,  ii) pegging  a  10x  FY14  P/E  to  its  existing  water  business  in  the  country,  and  iii) ascribing an equity value of MYR45m to its property development arm, we derive our FV of MYR0.80 for SALC. We have a NON-RATED call on the stock.

Financial Exhibits

SWOT Analysis

•   Leading water and wastewater engineering company in Malaysia.

Company Profile
Salcon is the leading water and wastewater engineering company in Malaysia, offering value-added services in the investment, design, construction, commissioning, operation and maintenance of such plants. It has also recently ventured into property development

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Source: RHB