Vivocom’s long-term prospects remain bright

by **Cals** Wed 29 Jun 2016, 03:09

Vivocom’s long-term prospects remain bright

By CIMB Investment Bank / The Edge Financial Daily | June 28, 2016 : 10:04 AM MYT [You must be registered and logged in to see this image.]

This article first appeared in The Edge Financial Daily, on June 28, 2016.

Vivocom International
Holdings Bhd
(June 27, 22.5 sen)
Maintain add with a target price (TP) of 78 sen: The Edge weekly reported that Vivocom International Holdings Bhd (Vivocom) chief executive officer (CEO) Datuk Seri Dr Yeoh Seong Mok may opt for early retirement.

Yeoh turns 60 years old this year and we understand that a transition plan is being put in place for him to remain within the group, but in a less strenuous non-executive/advisory role. However, no timeline has been given yet for this transition period.

Vivocom’s two deputy CEOs are also capable of filling the role as they are co-founders/partners of Yeoh since the early days of Vivocom and WY Consulting Sdn Bhd.

While sentiment in the near term could be negative given the uncertainty around the group’s leadership, we believe Vivocom’s long-term prospects remain bright due to: i) Yeoh will still remain in Vivocom where his relationship with China Railway Construction Corp Ltd (CRCC) will still bring forth more contracts for Vivocom; ii) Vivocom is expanding its business partnerships beyond CRCC, for example Zhonghe Huaxing Development Pte Ltd (Zhonghe Huaxing); and iii) its RM900 million in new contract wins this year have been from non-CRCC clients, testimony that it is not reliant on only CRCC for job wins.

On May 31, Vivocom signed a letter of intent to partner with Zhonghe Huaxing, a subsidiary of China Nuclear Engineering Corp (state-owned enterprise of the Chinese government and purchaser of 1Malaysia Development Bhd’s power assets), for collaboration on construction projects.

We are positive on this development as Vivocom needed a reliable Chinese sub-contractor to help alleviate working capital needs by taking on some of Vivocom’s non-CRCC jobs.

We maintain our “add” rating on the stock, with an unchanged sum-of-parts-based TP.

We value the construction business at 10.5 times, based on a 30% discount to the average sector price-earnings ratio of 15 times, comparable to other pure contractors of this size and in line with the expansion in sector multiples over the past six months given the bullish outlook of the construction sector.

Risks to our TP are project delays and execution. We expect Vivocom to announce a bonus issue in July.

In addition, Vivocom’s second quarter of financial year 2016 (2QFY16) results at end-August should continue the momentum of the strong earnings following 1QFY16’s decent showing.

These are potential rerating catalysts for the stock. — CIMB Investment Bank, June 25