Vivocom’s unique position presents compelling risk, reward — Analysts
Borneo Post Online***April 30
The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) in its initiation report of Vivocom, noted that its unique operating model as a project manager and the subcontractor, minimises the risks of rigid project schedule, design variations and excessive approvals procedures and variations of construction design.
Currently, Vivocom are venturing into public housing to increase its track record for domestic public housing jobs,” it added.
Aside from that, Vivocom has a strong order book for heavy, civil, commercial and industrial engineering from China Railways Construction Corporation Ltd (CRCC) in Malaysia via a technical joint venture for project management and sub-contracting.
MIDF Research noted that while there is a risk of a slowdown in the construction sector due to policy reversal through the reduction of development expenditures by the governments of Malaysia and/or China, it anticipated a moderate degree of structural risk exposure.
Other risks in the stock include severe depletion in net working capital and structural risks pertain to 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, such as projects that require specific technical capabilities such as railway engineering (signaling and telecommunication.)
MIDF Research noted that without the strong covenant and contract provision with clients and vendors, Vivocom would face a heightened risk of the vendors and suppliers exiting pre-maturely or unpredictability in supply or services for project execution.
Nevertheless, it pointed out that Vivocom has a strong pretax margin, positive operating cash flow, strong orderbook from joint venture strategy, and a steady recurring income from its telco 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,” it opined.
Additionally, Vivocom enjoys steady recurring income from the rentals of 50 telecommunication assets nationwide with the three-year average contribution of RM25.4 million per annum on the back of an admirable 15 per cent net margin.
“The telco segment amounts to 21 per cent of its total revenue. Although, the growth of the telecommunication industry is sluggish; rentals from telecommunication assets are steady due to service provisions in contractual billings and network coverage,” it said.
Looking ahead, the research team believed that Vivocom would be able to clinch heavy, civil and heavy construction packages such as the M101 Skywheel Tower in Kuala Lumpur, in upcoming quarters.
Vivocom is also bound to be driven by the ‘One Belt One Road’ (OBOR) policy via its partnership with CRCC.
Aside from that, Vivocom has attracted institutional foreign shareholding amounting to 5.4 per cent currently, MIDF Research said.
“Moreover, Beijing Construction Group has expressed interest to participate in their equity capital structure as well as appointing Vivocom as their local project delivery partner (PDP),” it added.
Overall, MIDF Research initiates its coverage of Vivocom ‘buy’ recommendation.