New Silk Road Beneficiary INVESTMENT HIGHLIGHTS

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Alicia Barker
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1 28 January 2016 Smallcap Highlight Vivocom International Holdings Berhad New Silk Road Beneficiary INVESTMENT HIGHLIGHTS Non-Rated Fair Value (FV): RM0.59 Vivocom International Holdings Berhad (VIHB) is transforming into a serious player within the various segments of the construction value chain as it assumes the roles of project manager, main and sub-contractor. VIHB is seen as a beneficiary of China s massive FDI into emerging economies as part of their New Silk Road development policy. We value the company at RM0.59 per share by applying sum-of parts methodology. Key Investment Thesis: 1. Project Management and Sub-contractor Business Model. RETURN STATS Price (27 Jan 2016) Target Price Expected Share Price Return Expected Dividend Yield Expected Total Return RM0.275 RM % 0.0% % Operates in a sweet spot segment of the construction value chain as both project management consultant and subcontractor. Risk avoidance strategy of minimal capex through sub and main contracting thus removing tender and performance bond costs for construction projects. Expect steady jobs inflows from China Railways Construction Corporation Ltd. (CRCC) and CRCC Malaysia Berhad. Solid recurring income from rentals of 50 telco assets. Participation from China-based construction companies through its New Silk Road development policies. 2. Healthy Financials Expect pretax margin of 10% to 12% which is above its peers in the KL Construction Index of 8%. Average 3-year positive operating cash flow of RM16.16m. Expect growing and sustained order-book replenishment rate. Steady recurring average 3 year revenue from telco assets of 21% (RM25.4m). Potential re-rating catalyst based on our assumption of VIHB construction PER of 13x vs. sector average PER of 16x. STOCK INFO KLCI 1, Bursa / Bloomberg Board / Sector Syariah Compliant 6238/ VIVO MK ACE/Construction Yes Issued shares (mil) Par Value (RM) 1.00 Market cap. (RM m) Price over NA 1.37x 52-wk price Range RM0.07 RM0.34 Beta (against KLCI) 0.88x 3-mth Avg Daily Vol 70.2m 3-mth Avg Daily Value Major Shareholders (%) RM19.5m Golden Oasis S/B 24.4 Ang Li Hann Anne Kung 5.3 MIDF RESEARCH is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures

2 3. Strategic position in construction value chain Operates as a project delivery partner (PDP) by setting project objectives, performance progress rate monitoring, procurement, control of the process design, estimation and construction coordination as well as stakeholder management. Extensive technical capabilities for subcontracting from the project management role through technical joint venture with CRCC and China MCC especially for industrial, heavy civil and telecommunication construction engineering tenders. Business Model History Incorporated as Instacom Engineering Sdn. Bhd in 2001 for providing the services of radio frequency services, maintenance and procurement of radio frequency services and civil and engineering for telco tower. In 2012, Instacom gained listing status on Bursa Malaysia MESDAQ after it successfully completed the reverse take-over of I- Power Berhad. In 2016, it officially assumed its current name of Vivocom International Holdings Berhad. Business Sub-contracting and project manager role reduces the risk of tender cost and performance bond. Sweet spot segment as the main and sub-contractor which enable VIHB to mitigate the high capital and development expenditures such as tendering costs and performance bonds for project. Through its role as project manager, VIHB is able to control costs, design, progress rate and construction estimates. Thus, its role as both main and sub-contractor will benefit through predictable progress billing and comprehensive control over the construction process. Technical Joint Venture with CRCCB and CRCCG for construction projects. Strong order book for heavy civil, commercial and industrial engineering from CRCC and CRCCG in Malaysia and Indonesia via a technical joint venture for project management and sub-contracting. Niche capabilities in telco engineering. Specialized technical capabilities in (i) mechanical and engineering in installation, commissioning, (ii) testing and erecting telecommunication towers up to 100 metres, and (iii) civil & cabling with HDD machinery for fibre infrastructure work. Recurring income from rentals of telecommunication assets. Stable and solid recurring income from the rentals of 50 telecommunication assets to telecommunication providers such as Maxis, UMobile, DiGi, and Celcom, as well as MCMC. 2

3 Financials Expect healthy pretax margin. VIHB is expected to record pre-tax margin rates between the ranges of 10%-12% which is above the KL Construction Index average of 8%. VIHB s expected operating margin is illustrative of its business model in project management and sub-contracting. Its positions in the construction value chain enables the reduction for construction cost of tender, performance bonds and mobilization fee. Positive operating cash flow. The operating cash flow has been positive due to its prudent and risk adverse strategy of meticulous project selection and scheduled progress billings. VIHB has recorded a 3-year average free cash flow (FCF) of RM 15.5m which is not heavily saddled by interest payment, capital and development expenditure. We are expecting the positive cash flow to be sustainable with an estimated growth rate of +30% underpinned by healthy margin and cost structure. Strong orderbook from joint venture strategy. What is more surprising is the rate of its orderbook replenishment. VIHB s orderbook has grown by +33% from RM1.8bn in Q32015 to RM2.4bn to-date especially in mixed development construction segment. The total construction backlog is indicative of the success of its joint venture strategy with CRCC by acting as the project manager, sub-contractor or combination of both. VIHB stands as a frontrunner for sub and main contracting or project delivery partner in most of the projects financed by CRCCB or CRCCG as VIHB functions as the local construction partner. Steady recurring income. Additionally, VIHB enjoys steady recurring income from the rentals of 50 telecommunication assets nationwide with the 3-year average contribution of RM25.4m per annum on the back of an admirable 15% net margin. The telco segment amounts to 21% of its total revenue in Although, the growth of the telecommunication industry is sluggish; rentals from telecommunication assets are rather steady due to service provisions in contractual billings and network coverage. Dividends. VIHB has yet to announce their dividend policy. The feedback from management has indicated a strong possibility of announcing interim dividends in FY18. Prospects. We believe that VIHB is able to clinch projects related to railway constructions and engineering as well as RAPID, Pengerang. Our assessment derives from their working arrangements with (i) CRCC for double track construction, and (ii) consortium of upstream petroleum engineering companies for RAPID, Pengerang projects under Technicas Reunidas SA. Additionally, VIHB has attracted institutional foreign shareholding amounting to +5.4%. Moreover, Beijing Construction Engineering Group has also expressed interest to participate in VIHB equity capital structure as well as appointing VIHB as their local project delivery partner (PDP). 3

4 Key Risks Key Delivery Key risk in delivery for construction processes are cost, time, quality and environment. However due to VIHB unique business model being a project manager as well as the main and subcontractor; the risks of rigid project schedule, design variations and excessive approvals procedures and variations of construction design are minimized. The risk is evident given the current scenarios: Outstanding current orderbook of RM2.4bn. Lower sales in commercial and property sales nationwide due to declining loans growth. Exposure to significant regulatory and political risk through location of project in Indonesia such as Jakarta-Bandung High Speed Rail. Legacy telecommunication asset overheads which increases its construction expenditure although the incurred cost is forecasted to reduce its earnings only in FY16F. The telecommunication engineering cost is estimated to taper down in FY16F and FY17F through steep reduction in fabrication activities. We believe that the construction risks are addressed by VIHB through diversification by taking projects in various segments of industrial, commercial, residential and heavy civil in their orderbook. Our check with the management reveals that VIHB s current strategy is not to specialize as a contractor by putting all of its eggs in one nest but to generalize its capabilities to further widen its orderbook. Structural Structural risks such as contract provisions and definition especially on the role as a project management and a sub-contractor as well as the strength of the contractual covenants. For example, projects that requires specific technical capabilities such as railway engineering and signaling and telecommunication. Without the strong covenant and contract provision with clients, VIHB would face a heightened risk of the vendors and suppliers exiting pre-maturely or unpredictability in supply or services for project execution. Slowdown in construction sector through the reduction of development expenditure by the Malaysian government and government of China. We anticipate a moderate degree of risk exposure structurally through (i) due diligence of projects before acceptance, and (ii) the historical performance of project execution through reliance of supplies and technology from clients such as CRCCMB. 4

5 Valuation Based on its current construction orderbook of RM2.4bn at 11% net margin with WACC of 9%, the DCF-derived present value of VIHB construction business stands at merely RM0.04 sen per share. However, we reckon the present value based on existing orderbook is not truly indicative of the growth potential of VIHB construction business. This optimism is premised on the prospect of VIHB annual orderbook replenishment target rate of RM950m (sub and main contractor roles as well as project delivery partner) pursuant to its technical joint venture with CRCC as well as other close working relationships with China MCC and Regal International Group. It is also worthwhile to note that the order book of CRCC in the region currently amounts to >RM9.0bn. Based on our discussion with the management, an annual orderbook replenishment target rate of RM950m for VIHB is achievable through (i) the technical joint venture with CRCC, and (ii) policy of project completion guarantee. Therefore, based on (i) a more conservative annual orderbook replenishment rate of RM685m, (ii) at 11% net margin, and (iii) PER multiple of 13x which is comparable to other small cap construction companies, we believe the fair value of VIHB construction business stands at RM0.40 sen per share. In summary, inclusive of its 3 main businesses, our fair value for VIHB is RM0.59 per share based on FY17F sum-ofparts methodology. SOP VALUATION Segments Basis Indicative Value (RM'm) Per Share (RM) Construction FY17 PER of 13x Aluminium Manufacturing FY17 PER of 12x Telecommunication Assets FY17 PER of 12x Total Sum of Parts Net Cash SOP Per Share 0.59 No of Shares (mil) 2475 Source: Company, MIDFR INVESTMENT STATISTICS FYE DEC (RM m) F 2016F 2017F Revenue Gross Profit Net Profit EPS (Sen) EPS (Growth)(%) N/A (86) PER Source: Company, MIDFR 5

6 DAILY PRICE CHART Syed Muhammed Kifni Fadhli Dzulkifly abdul Source: Bloomberg, MIDFR APPENDIX 1: CURRENT ORDERBOOK EXHIBIT 1 Projects Commencement Value (RM mil) Progress & Notes One Gateway Klang Phase I March, Announced One Gateway Klang Phase II March, Announced Pavillion Hilltop March, Announced K168 February, Announced Kemensah Heights February, Announced D Idaman (Phase 3b) March, Announced D Idaman (Phase 5) Oct, Announced Tropics (Regal Sarawak) March, Finalising BQ V Plaza Balakong Q3, Final Stage Regal Singapore Q3, Finalising BQ M101 Skywheel Q3, Finalising BQ Penang Tunnel Q4, Finalising BQ Tamarind Square Jan, Announced Eclipse Residence Jan, Announced KL Gateway March, Announced Lumi Tropicana March, Announced Total Current Orderbook 2,

7 APPENDIX 2: CONSTRUCTION ACTIVITIES Exhibit 1: Pavillion Hilltop Mont Kiara Exhibit 2: Pavillion Hilltop Mont Kiara Exhibit 3: Tower Construction Exhibit 4: Tower Construction Exhibit 5: Marinox Penang Construction Exhibit 6: Marinox Penang Construction 7

8 MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad ( X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL SELL TRADING SELL Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. Total return is expected to be <-15% over the next 12 months. Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months. 8

WCT Holdings Berhad KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION FOR IMPORTANT DISCLOSURES. Reaffirm BUY Unchanged Target Price (TP): RM2.

WCT Holdings Berhad KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION FOR IMPORTANT DISCLOSURES. Reaffirm BUY Unchanged Target Price (TP): RM2. 21 October 2014 Corporate Update WCT Holdings Berhad Acquiring another piece of land in Bandar Serendah Reaffirm BUY Unchanged Target Price (TP): RM2.59 INVESTMENT HIGHLIGHTS Acquiring 220.74 acres of