KUCHING: The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) emerged from a meeting with Vivocom International Holdings Bhd (Vivocom) executive director Choo Seng Choon feeling reassured with its estimates.
MIDF Research noted that year-to-date, Vivocom share price decreased 36.11 per cent and comparatively, 53.63 per cent from its high in May, 2016.
The research arm attributed the tumble to bad press and market cyclicality.
Guided by its observation, Vivocom presents a very attractive yield of 10.5 per cent on the back of 6.75 per cent spread against the five-year Malaysian Government Securities (MGS) yield of 3.76 per cent.
Turning to the group’s progress, MIDF Research believed concentration is vital to maintain Vivocom high margins.
“Closely, the management stresses on maintaining margin though concentration of design and build contracts and affordable housing,” MIDF Research said.
MIDF Research remarked in its last report that Vivocom will not be able to continue 14.7 per cent operating margin for financial year ended 2017 and 2018 (FYE17-FYE18).
“However, the management have indicated that the margins are attainable albeit blips in between progress billings and revenue recognition due to total orderbook size of RM2.3 billion inclusive of projects from Neata Aluminium,” it added.
The research arm was confident that earnings will grow stronger in FYE18 backed by Vivocom’s strong revenue growth and profit margin as compared to the group’s peers.
MIDF Research noted that for affordable housing, the management has indicated that Perak and Terengganu present stable opportunities as the demand is continuous.
“Looking at Perak, the demand of residential projects has maintained its growth trajectory.
“Similarly, in Terengganu residential projects is stable notwithstanding smaller scale,” the research arm said.
It added that current Vivocom’s construction orderbook of RM1.8 billion or approximately two-fold FYE17 revenue cover.
The research arm expected Vivocom to replenish RM600 million of jobs for FYE17/FYE18/FYE19 led by affordable housing and mixed development.
On a side note, MIDF Research acknowledged that the capital control imposed by People’s Bank of China (PBOC) for state-owned enterprises (SOE) could slowdown progress for project bidding.
“The news spooked property developers targeting mainland Chinese buyers, but for design-and-build contractors such as Vivocom opportunities for rail related projects are abound,” the research arm said.
“South China Morning Post reported that the PBOC have eased the yuan outflow earlier in January, 2017 hence, we surmise through the ‘One Belt One Road’ initiative, the tone for overseas investment approval is more permissive towards SOEs.”
“As an example, China Investment Corporation completed a deal with Blackstone Group to purchase Logicor for a sum of US$13.8 billion (RM58.0 billion) in early June.”
“Thus, its joint-venture with China Railway Construction Corporation (CRCC) is in fact a blessing in disguise as Vivocom can participate in the bidding for construction jobs for the East Coast Rail Line (ECRL) and High Speed Rail (HSR).”
As for financing, the research arm reckoned that China Construction Bank which started operation in Malaysia in early June would lend support to CRCC; therefore Vivocom would unlikely be in a tight spot for project funding or payment.
On the basis thereof, MIDF Research reaffirmed its ‘buy’ recommendation with a target price of RM0.40 per share based on discounted cash flow (DCF) with weighted average cost of capital (WACC) of 7.4 per cent.