Salcon unlocks China investment

by **Cals** Tue 17 Sep 2013, 02:49

Published: Monday September 16, 2013 MYT 12:00:00 AM
Updated: Monday September 16, 2013 MYT 7:12:01 AM
Salcon unlocks China investment

SALCON BHD
By Affin Investment Bank
Buy (maintained)
Target price: RM0.87

SALCON announced that it has entered into two conditional agreements with Beijing Enterprises Water Group Ltd (BEWG) for the disposal of 100% stakes in six companies involved in water-related businesses in China for a total of 955 million yuan (RM518.3mil).
Excluding the 40% stake in Salcon Asia not held by Salcon, total proceeds from the proposed disposals attributable to Salcon is 712.8 million yuan (RM386.8mil).
The six companies are Salcon Darco, Salcon Jiangsu, Salcon Fujian, Salcon Zhejiang, Salcon Linyi and Salcon Shandong.
BEWG is currently involved in the construction of the Pantai wastewater treatment plant in Malaysia.
In view of a tougher and more challenging operating environment in China (we understand, including possible difficulties in getting approval for scheduled tariff hikes), the proposed disposals provide Salcon with the opportunity to unlock and monetise its investment in the China concessions.
Upon completion, the proposed disposal will generate total cash of RM284mil (after netting off borrowings of RM102mil) and disposal gains of approximately RM94.6mil.
In a separate announcement, Salcon said its 50.01%-owned subsidiary Nusantara Megajuta had signed a letter of intent with Eco World Development to appoint the latter or its nominated project management subsidiary, Eco World Project Management, as the project manager for the RM1.2bil Johor project.
Eco World is a new player in the land development business and is reportedly linked to former shareholders and managers of the SP Setia Group.
We will exclude the estimated net profit contributions from the China water concessions from our financial year 2013 to 2015 forecasts and adjust the headline net profit for the disposal gain of RM94.6mil upon completion of the proposed disposal, expected in three months.
Salcon’s share of the disposal consideration of RM386.8mil for its China water assets looks fair, being approximately 7% below our revised net asset value (RNAV) estimate of RM413.8mil.
Salcon also remains in contention for the Langat 2 project which it is bidding jointly with MMC and Ahmad Zaki Resources Bhd.