• Flurry of ECER/ECRL related news is vitalising to Vivocom’s airport bid

• Airport passenger traffic outpaced capacity

• Positive impact to earnings in FYE18

• Nonetheless, we maintain our BUY call with a TP of RM0.40 per share

Flurry of ECER and ECRL related news is vitalising to Vivocom’s airport bid. The recent flurry of news on the East Coast Economic Region (ECER) investment inflow is a vitalising sign of potential construction projects picking up pace. Particularly, in Kelantan where the East Coast Railway Link (ECRL) would make its last stop – Sultan Ismail Petra Airport (SIPA). We are expecting China Railway Construction Corp Ltd. (CRCC) to clinch RM450m worth of job the job to expand SIPA due to China Construction Communication Company’s (CCCC) involvement in the construction of ECRL. Moreover, Export-Import Bank of China would be able to provide soft loans. Hence, this would create another opportunity for Vivocom to undertake the potential subcontracting job.

Airport passenger traffic outpaced capacity. For the past 5 years, SIPA passengers have grown +10.37% (CAGR) annually (Figure 1). In 2016, its passenger amounted to 2.06m but the airport has the capacity of handling 1.45m passengers. Thus, it is crucial that the airport upgrade for 4.0m passengers capacity must be concluded before ECRL is completed in 2024. The proposed upgrades include (a) apron expansion, (b) enlargement of runway/taxiway, and (c) construction of new terminal, i.e. contact pier finger terminals. We reckon that the packages will not be segmented; consequently, subcontractors such as Vivocom could end up taking up the entire package.

Positive impact to earnings in FYE18. The impact on Vivocom’s earning would be positive as it would amount to 75% of our target orderbook replenishment rate for FYE18 on the back of 12.0% margin. We are not foreseeing any margin compression as the current SIPA design is based on open apron and its upgrade will not change the original layout but merely upgrading its service capacity.

Recommendation. Altogether, we maintain our BUY call with a TP of RM0.40 per share based on discounted cash flow (DCF) with WACC of 7.4%. Our target price implies an enticing +325% upside backed by an undemanding current PER of 10.32X.

Source: MIDF Research - 9 Aug 2017