What’s Up? Salcon

Salcon

What’s Up? … dated Jan 2011

It has sealed a deal to divest a 40% stake in Salcon Water (Asia) Ltd, which currently holds the company’s six water concessions in China, for Rm112 million in cash. The buyer is Emerging Markets Infra Fund Pte Ltd (EMIF).

EMIF pay a premium of the water assets, valued at 2.3 times book value, and that implies the asset quality.

The premium pricing also provides a yardstick valuation of Salcon’s shares on Bursa Malaysia . The company owns the remaining 60% equity interest in Salcon Water ( Asia ).

The offer price of rm112 million for 40% stake in Salcon Water Asia values Salcon’s concessions at Rm280 million or 59.5 sen per share.

For 3QFY2010 ended Sept 30, 2010, Salcon reported a lower profit of rm4.2 million or 0.54 sen per share. Revenue shrunk to rm78 million.

Earnings were lackluster was due to its poor performance of its construction division. Apart from projects delay, cost overruns, particularly from its Dewan Bandaraya Kota Kinabalu Sewerage project in Sabah , also hurt operation margins in its construction division.

For nine months ended Sept 30, 2010 Salcon reported higher net profit of rm21 million against rm16.8 million previously.

The construction division, which mainly secures local projects, contributes about 60% of Salcon’s profits, while the China operations generates about 30%.

The disposal will gain some rm60 million and will give Salcon more capital to look for new concessions in China . Furthermore, the new strategic partner will lend financial support for any expansion in China . Otherwise, the company may have to make a cash call to fund an expansion should the need arise.

Among the concession that Salcon has in China are water treatment and waste water treatment plants.

With the track record and the networks that Salcon has built, the company is likely to win more concessions in China .

Besides bidding for more concessions, the existing concessions will also be expanded in terms of capacity as a result of continued growth in demand for treated water as well as an increasing need for waster water treatemtn as urbanization continues in China .

The concessions in China provide the company with recurring income to cushion the cyclical earnings from its construction division.

Given the steadily growing concession earnings, the company’s cash flow is expected to expand. As at Sept 30, 2010, Salcon’s cash balance was rm139 million with long term borrowings of rm168 million and short term borrowings of rm36 million.

Apart from China , Salcon’s is exploring opportunities in Sri Lanka , Vietnam and India . Salcon is looking at infra development projects in Sri Lanka .