Vivocom presents attractive opportunity despite volatile market conditions

0
File photo shows an artistic impression for Vivacom’s projects. The continuous expansion in its orderbook of RM3.3 billion coupled with improving balance sheet would potentially translate into positive earnings accretion for FY16 and FY17.

File photo shows an artistic impression for Vivacom’s projects. The continuous expansion in its orderbook of RM3.3 billion coupled with improving balance sheet would potentially translate into positive earnings accretion for FY16 and FY17.

KUCHING: Despite the current volatile market condition, analysts believe that Vivocom International Holdings Bhd (Vivocom) provides a compelling risk/reward profile with a fundamental upside.

The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) said amidst the clamour of the volatile market, Vivocom presents a compelling risk/reward profile with fundamental upside supported by robust current orderbook of RM3.3 billion.

It also pointed out that the continuous expansion in its orderbook of RM3.3 billion coupled with improving balance sheet would potentially translate into positive earnings accretion for the financial year 2016 (FY16) and FY17.

“Currently, its orderbook has expanded from RM2.4 billion in the fourth quarter of 2015 (4Q15) to RM3.3 billion – an increase of 37.5 per cent.

“Going forward, we estimate that its orderbook will grow further from RM3.3 billion to RM3.9 billion by 4QFY16 (an increase of 18 per cent) on the back of 36 months backlog. We are forecasting Vivocom to win circa RM950 million of jobs for FY16 estimate,” it said.

As a result of orderbook expansion, the research team noted that the earnings are slated to grow 5.5-folds of its current levels in FY16F/FY17F.

“Additionally, Vivocom’s sustainable margins of circa 10 per cent will be achievable due to its less capital intensive construction contracts, viz project delivery partner and sub-contracting, through larger China-based contractors such as China Railways Construction Corporation (CRCC) and China Nuclear Industry Huaxing Construction Company Ltd (CNH).

“Its current cash level of RM23 million gives ample financial headroom to increase its mobilisation into sizeable projects that it has tendered such as in Kinta Valley and Tronoh, Perak,” it explained.

The research team also viewed Vivocom’s joint venture with CNH as beneficial for the company’s growth.

It noted, the joint-venture with CNH is another strong catalyst for Vivocom due to the speedier and reliable decision making process.

“CNH is listed in the Shanghai Stock Exchange and its decision making is through the appointed management. Hence CNH’s decision is arguably speedier than CRCC as it has less reliance on the state to make decisions for projects roll-out thus giving certainty to its decision making process.

“Our channel checks indicated that CNH has strong working relationship with China Exim Bank and Industrial and Commercial Bank of China (ICBC) as it has the track record of successfully completed the construction of Global Innovation Centre of Johnson & Johnson, Shanghai, Al Hassan Sports City, Jordan and Shanghai International Gymnastics Centre.

“The joint venture with CNH is beneficial because it removes the risk of execution as Vivocom can step- up on its capacity to take up projects.

“Furthermore, Vivocom can participate in heavy engineering projects such as oil and gas and energy tenders banking on the expertise of CNH,” it commented.

Another advantageous change that MIDF Research observed is that Vivocom’s management are focused to strengthen their fundamentals such as reducing pressure to its balance sheet through increasing its cash flow from operations (CFO) from RM3.7 million in FY14 to RM8.7 million in FY15 (an increase of 135.5 per cent year-on-year) and improving its operating margin from 9.3 per cent in FY14 to 12.25 per cent FY15 (an increase of 31.7 percentage points year-on-year).

“Moreover, shareholders fund has been steadily increasing from RM167.5 million in FY14 to RM329.4 million in FY15 (an increase of 96 per cent year-on-year).

“We also view that Vivocom’s management is balancing its large share base with strong fundamentals to avoid the tendency of depleting its working capital whilst growing its orderbook and increasing its debt level,” it said.

Despite the positive traits, MIDF Research pointed out that there are still risks in the stock. It pointed out that the issue of concentration and execution risks looms through the surge of materiality of receivables (revenue/receivables), which is from 2.6-folds in FY14 to 3.4-folds in FY15.

“Nevertheless, in order to balance our view, we note that the construction contracts per CIDB Guidelines 2007, Persatuan Akitek Malaysia (PAM) and Public Works Department (PWD) stipulates various positive clauses that addresses payment and price adjustments hence comforting any ‘hard landing’ in Vivocom’s construction schedule.

“Secondly, to address the materiality of concentration risks of projects related to China SOEs (state-owned enterprise), the management has illustrated its commitment by tendering into various state government projects such as in Perak,” it said.

Overall, the research team reaffirmed its ‘buy’ call on the stock.