Update On Salcon

Blogged previously: Regarding Salcon

Quote from that posting:

• Anyway, as mentioned before, some would argue that it is not healthy just looking at the past. The future is just as important and as Salcon had some order book worth 650 million and bidding for billions of contract and surely based on future expected earnings, then perhaps there are justifications to be optimistic for Salcon.
  
  Which is why this posting.
  
  I have to give credit where credit is due.
  
  LOL!
  
  Else, I be accused to be a mind less open.

The stock price then was 59 sen. The stock closed the year at 69 sen. This morning, I would like to do a ROI on Salcon.

So what's a ROI?

Feb 2006, I wrote ROI on Uchi

Quote:

• ROI - the Review of Investment
  
  So you have purchased yourself an investment in a great business at a good price. So what do you do?
  
  Do you honestly think it is wise to leave your great investment aside and hope that your investment will grow forever and ever?
  
  Get real!
  
  That's the harsh answer I keep reminding myself. For in the real businessworld, most businesses simply cannot grow forever and ever. Leaving our investment aside and hope that our investment(s) will grow into a 10 or 20-bagger is simply foolish thinking.
  
  Remember we are but normal average investors. And because we are normal average investors, we are more likely to make mistakes, either via faults in our own stock selection process or the company that we have vested interests, might not be a good company anymore! And if it is no longer a good company, why hold on to the investment?
  
  Which is why the ROI is so important. We need to review our investment to make sure that the stocks we are holding is still a good stock. We need to review if the very reasons to invest in the stock remains valid. Now if the stock is no longer good, it simply makes no sense to hold the stock.

LOL! Now please do note twist this posting!!!!.

This is not to say and I am not suggesting that Salcon is THE investment one should have made but I am going to apply the same ROI principle and review the statement made in November 2009, " .. perhaps there are justifications to be optimistic for Salcon."

Salcon had since announced its quarterly earnings back in Nov 2009, and ... yes, I had overlooked it and I had not made an update to the stock.

Firstly, the improved earnings as stated in the posting Regarding Salcon

1. So what should one be expecting? If one was optimistic in the stock, what's one expectation?

Isn't the answer a plain and simple, 'more earnings'?

From the earlier posting:

..............Sales...... net profit
09 Q2.....111.649 -- 6.410
09 Q1..... 79.763 - - 3.247
08 Q4..... 81.039 - - 1.453
08 Q3..... 64.537 - - 1.853

That was the set of earnings one was looking at back in November. Now Salcon announced its earnings on 25th November 2009.

Here's the screen shot of its earnings.

Net earnings came in at 7.139 million. Total 3 quarters net earnings came in at 16.796 million.

So question that need to be asked and answered is 'Did Salcon's earnings improve on a q-q basis? Did Salcon's earnings improve on a y-y basis'?

How? Are you impressed? Is there justifiable reason to be optimistic?

2. Do you reckon the earnings growth is sustainable?

Firstly, if this was my ROI, I would NEED to understand why and how is Salcon doing so much better. From the company's earnings notes.

• Review of Performance of the Company and its Principal Subsidiaries
  
  For the current quarter under review, the Group achieved revenue and profit before taxation of RM109.54 and RM10.98 million representing 70% and 204% higher respectively as compared with the corresponding quarter in the preceding year. Higher revenue and profits were mainly attributable to the construction activities as well as the concessionaire in China.
  
  For the cumulative quarter to date, the Group recorded revenue and profit before tax of RM300.95 million and RM25.12 million representing 75% and 121% higher respectively as compared to the corresponding quarter in the preceding year.

So according to the company, the 'Higher revenue and profits were mainly attributable to the construction activities as well as the concessionaire in China."

Well in December 2009, there were a couple of rather bullish article published on the Star business website. Salcon seals seventh concession in China and Unlocking Salcon's value

From the first article.

• YIZHENG, JIANGSU PROVINCE: Water and wastewater solutions provider, Salcon Corp Bhd, sealed its seventh concession in China following the award of a 30-year concession by the municipal government of Yizheng to its joint-venture (JV) company Jiangsu Salcon Water & Environmental Development Co Ltd.

Seventh concession in China.

From the second article.

• Growing order book
  
  Salcon’s current orderbook stands at RM1.2bil, out of which around RM706mil is the unbilled portion (72.4% in domestic market and 27.6% overseas such as Sri Lanka and Vietnam).

Growing order book.

Would this indicate that there's a possibility that Salcon's earnings could continue to grow?

3. How about Salcon's financials?

Quote from the blog posting made in November 2009.

• Now in the earlier balance sheet at 07 Q2, Salcon had cash balances of 122.127 million and total loans of 104.322 million. (net cash of 17.805 million)
  
  The latest, Salcon cash balance of 211.023 million and total loans of 165.264 million. (net cash of 45.759 million) Receivables had soared to 202.829 million versus 76.026 million. (Yes, the high receivables are a huge issue. The receivables did show slight improvement because the previous year, Salcon's receivables were at 236.138 million.)

Now since Salcon's earnings is improving, what is one's expectations?

Here's the screen shot of Salcon's balance sheet as per its quarterly earnings announced on Nov 2009.

Receivables soared to 299.382 million!

Now this is one huge concern yes?

Cash is now at 129.999 million. Previously, as stated in the earlier posting, "Salcon cash balance of 211.023"

Another concern yes?

Total loans now stood at 110 million. Previous quarter it was 165 million!

Now this is a massive improvement.

Which means Salcon is in a net cash positon of 19.9 million, compared to a net cash of 45.759 million previous quarter. Net cash had decreased.

So what do we have? Two HUGE concerns. Cash decreased and total receivables had increased. The positive is that total debts decreased to 110 million.

How?

Anyway, from the Star article: Unlocking Salcon's value

• Gearing up
  
  “I think we are in a position to further gear up and expand,” How says, adding that the company is targeting a gearing level of not more than 1.5% from the present level of 0.5%.
  
  Sitting on a huge cash pile, Salcon is viewed to be in a good position to re-invest its cash for further expansion of its businesses, particularly in foreign markets.
  
  According to the company’s financial controller, Law Woo Hock, Salcon plans to use its internal funds to part-finance its investment overseas. Conventional bank borrowings will be deployed as a complementary source of financing.
  
  As at Sept 30, 2009, Salcon’s cash pile stood at RM125.84mil, compared with RM184.7mil as at the end of last year, while total group borrowings as at Sept 30 stood at RM110.8mil, compared with RM164.16mil as at the end of last year.
  
  Law explains that most of the group’s ventures are very capital-intensive, so the challenge for the group is to manage its balance sheet well. That, he says, is critical for the financial sustainability of the group.

It was rather interesting to see the CFO explain publicly on Salcon's financial issue.

Anyway, that's not important.

What's important is for the 'investor' to gauge for themselves and ask and answer themselves a very honest question: Is there still justifications for one to be optimistic in Salcon?

How now?

PS: This is NOT your new year morning whisky tipsy! I cannot guarantee that you would lose money in this stock! So do not ass-u-me hor.