Excerpts from analyst's report

NRA Capital analyst: Liu Jinshu

♦ A misunderstood business. We are mindful that the repeated negative share price reaction after DeClout’s key harvests has put off investors. In fact, the rapid sell-offs show a lack of confidence beyond expectations of short term gains from the harvests.

ASVIDA 14.5We highlight that DeClout’s remaining key subsidiaries made pre-tax profit of S$8.9m in 2015. Beaqon in particular is a proven business with rich pre-tax margin of 12.6% and is poised to grow at an accelerated pace as it takes on more projects. Stripping away the maximum proceeds from the sale of Acclivis and the market value of its Procurri shares, the rest of DeClout actually trades at a conservative P/E multiple of 8.0x FY15 earnings before corporate costs, suggesting high upside from future harvests.


Share price: 
20 c
34 c

Net cash balance sheet and upcoming pay-out to appeal to more conservative investors. As a vote of confidence, DeClout’s Group CEO Mr. Vesmond Wong has stepped in to purchase 9m, or 1.3%, of shares at S$0.20 each.

We estimate that DeClout will have up to 4.6 cents per share of net cash after the disposal of Acclivis. With the net cash, DeClout can afford to pay recurring dividends for several years, or even reduce its capital if its share price remains lacklustre. For instance, DeClout can spend S$8m to S$10m of maximum net cash of S$31.0m to buy back 5% of its shares, thereby increasing the concentration of its shares and reducing share price volatility.

♦ What's next?
Liu Jinshu"Given that DeClout now has the balance sheet to provide both downside protection and upside potential, future catalysts will be in relation to the completion of the disposal of Acclivis, e.g. shareholders’ approval at the EGM on 28 October, the receipt of cash on completion and the finalization of Acclivis’ FY16 accounts for any additional consideration, and any declared bonus to reward shareholders."

-- Liu Jinshu (photo)

Expect more stable profit growth in 2017 as new businesses gain traction. Organically, Beaqon is in a position to grow as the award of new telco spectrums will lead to higher demand for its products and services. DeClout will likely also accelerate Beaqon’s growth with new acquisitions, especially in security systems.

We note that existing security companies listed on the SGX trade at high P/E values of more than 20 times. Thus, growing the security business will help to enhance the valuation of Beaqon for harvesting in two to three years via a trade sale or IPO in an internationally recognized exchange such as Singapore or Hong Kong. Secondly, we see evidence of increased traction at vCargo Cloud, suggesting that it is a promising growth engine for DeClout in the future.

However, we caution that DeClout’s 3Q results will be impacted by the consolidated IPO expenses of Procurri of S$4.0m. Overall, we retain our Overweight rating, but reposition DeClout from high return/high risk to high return/low-average risk.

Full report here.

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