SYCAL - Small but profitable

Background:

Sycal Ventures Berhad (SYCAL) is mainly involved in i) construction specializing in civil and building construction works and ii) property business. In FY13 (ending December), construction division contributed RM12.2m Profit Before Tax (PBT) or 52% of the Group's total PBT of RM23.4m. As for property, PBT contribution is RM8.5m or 36% of Group’s.

Strong orderbook of RM640m

As of 30-Jun-2014, SYCAL’s construction division has orderbook of RM640m and this means the Group has earnings visibility of 3 years. Note that SYCAL construction division revenue is RM211m. Such a long earnings visibility of 3 years is considered very good for construction companies which usually have earnings visibility on average 2 years only.

SYCAL construction projects are concentrated in Taiping, Ipoh and the hotel project in Jalan Pantai Kuala Lumpur. Historically, SYCAL has delivered more than RM1.5b worth of projects for the government and private sector including low-rise and high-rise housing, infrastructure, landmark buildings, universities, hospitals and commercial developments.

Property division backed by RM500m GDV projects in Cheras KL

Its property projects are mainly in Cheras (Kuala Lumpur), Sitiawan (Lumut and Segari), Taiping and Ipoh. Some of previous completed projects in Cheras include Town Villas and Vista Harmoni Condominium.

Strong earnings growth (1H14 EPS + 38% to 2.66 sen).

Key driver behind the good earnings growth is construction division which saw its PBT +37% YoY to RM4.3m. Construction division benefited from the increase billing of shopping mall construction at Klebang Ipoh. Property division also did well with its PBT improved 91% YoY to RM4.26m which we think is due to better property prices in KL and Perak.

Almost Zero Net Gearing

Net gearing is only 0.3%. This is based on its 2Q14 total cash of RM6.4m, short term loan RM1.2m, long term debt RM5.8m and equity of RM196.2m. Comparitively, many other construction company has high net gearing exceeding 10%.

Trading at only 40.5 sen or 35% below Book Value of 62.1 sen.
This could mean the stock is extremely undervalued as its earnings visibility is good at 3 years, strong balance sheet and high earnings growth in 1H14 at 38% YoY.

Theoretical Target Price of 52 sen based on 9x FY15 Fwd. PE.

The 9x PE is in line with mid cap construction valuation. FY15E EPS should reach 5.75 sen assuming 8% earnings growth to FY14E EPS of 5.32 sen.