Vivocom’s 1Q net profit above expectations

by **Cals** Tue 17 May 2016, 02:11

Vivocom’s 1Q net profit above expectations

By CIMB Research / The Edge Financial Daily | May 16, 2016 : 1:16 PM MYT

This article first appeared in The Edge Financial Daily, on May 16, 2016.

[You must be registered and logged in to see this image.]Vivocom Intl Holdings Bhd
(May 13, 34.5 sen)
Maintain add with a higher target price (TP) of 78 sen:Annualised first quarter of financial year 2016 (1QFY16) net profit smashed our expectations at 76% above our previous full-year forecast.

Revenue tracked our expectations, but we had underestimated margins. Its 1QFY16 margins were boosted by tail-end recognition of progress billings of several building jobs.

What to expect for the rest of FY16 in the quarters ahead? We believe that progress billings from China Railway Construction Corp Ltd-awarded building jobs should start to flow through, such as Pavillion Hilltop, 1 Gateway Klang and Marinox Sky Villas Penang.

In the past two weeks, Vivocom announced two projects in Perak worth RM250 million, bringing its year-to-date contract wins to RM850 million.

More contract wins are expected ahead with a potential pipeline at the letter-of-intent stage of almost RM4 billion. We are confident that Vivocom will be able to meet and possibly surpass our RM3 billion contract win estimate for FY16.

We understand that Vivocom is finalising another large Perak contract worth up to RM700 million in the coming weeks.

Vivocom completed the last tranche of its previous private placement mandate on April 19 of 112 million shares (4.4%) at 26.4 sen.

In a press release, Vivocom hinted that a possible bonus issue could be in the pipeline.

In addition, if the pace of contract awards accelerates in the months ahead, we do not discount the possibility of another private placement to raise the necessary working capital to fund new projects.

We raise our FY16 forward earnings per share by 31% to impute a higher gross margin given the strong 1QFY16 results.

Our sum-of-parts-based TP is raised as we value the construction business at 10.5 times (versus nine times previously), based on a 30% discount to the sector’s average 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 for the construction sector.

We believe that Vivocom’s rerating has just begun. The strong 1QFY16 results should calm investors’ earlier concerns about Vivocom’s execution abilities.

In particular, investors were sceptical about Vivocom’s ability to deliver above-sector margins.

Potential rerating catalysts are large-scale project wins, continued delivery of above-sector margin execution and a potential bonus issue. — CIMB Research, May 12