Loxley - OSK
Loxley - OSK
Loxley - OSK
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RHB Research 27 Mar 2013<br />
THAILAND EQUITY<br />
Investment Research<br />
Daily<br />
Thailand Research<br />
66 2862 9755<br />
Initiating Coverage<br />
<strong>Loxley</strong><br />
Trading Buy<br />
Target<br />
THB10.60<br />
Previous<br />
Price<br />
THB6.95<br />
Telecommunications<br />
<strong>Loxley</strong> is a Thai conglomerate companies<br />
that involves in ICT business, Trading,<br />
Service and investments in JV companies<br />
Stock Statistics<br />
Bloomberg Ticker <strong>Loxley</strong> TB<br />
Market Cap THB13,755m<br />
USD469m<br />
52 wk H/L price 8.05 3.10<br />
3m ADT<br />
THB554m<br />
YTD Returns (%) 29.7<br />
Beta (x) 1.32<br />
Major Shareholders (%)<br />
Ekpavee Co. Ltd 26.49<br />
Thai NVDR 3.94<br />
Share Price Performance (%)<br />
Month Absolute Relative<br />
1m 0.8 1.9<br />
3m 24.8 14.2<br />
6m 46.2 27.8<br />
12m 67.9 40.3<br />
6-month Share Price Performance<br />
8.6<br />
7.6<br />
Price Close<br />
Relative to Stock Exchange of Thailand Index (RHS)<br />
199<br />
179<br />
Integrating The Future<br />
We initiate coverage on <strong>Loxley</strong> with a TRADING BUY and our FV at<br />
THB10.60, based on 3.6x FY13 P/BV. As a leading ICT contractor, the<br />
company is set to benefit from the rising investments in the ICT sector,<br />
which will provide it ample opportunity to further grow its backlog. Its<br />
ability to secure more backlog is not a worry, but the execution risks in<br />
turning the extra backlog into profit remains a key concern.<br />
An integrated ICT contractor. Despite having diversified exposure in several<br />
core business segments, <strong>Loxley</strong> can be more appropriately classified as an<br />
integrated ICT contractor, as about 70% of its revenue comes from its ICT<br />
business. With a growing backlog, its exposure to the ICT sector is set to<br />
increase further to the point where its ICT segment will continue to be the key<br />
driver for the group’s future prospects.<br />
Strong backlog, with further room to grow. As at early-FY13, <strong>Loxley</strong>’s ICT<br />
and project backlog stood at around THB8bn. 70% of it will be recognized as<br />
revenue in FY13 due to the short-term nature of the ICT contracts. <strong>Loxley</strong> has<br />
also identified THB28bn worth of high-potential projects from its existing and<br />
new clients from which it stands a good chance of capturing and adding on to<br />
its backlog in FY13.<br />
TRADING BUY. We initiate coverage on <strong>Loxley</strong> with a TRADING BUY and a FV<br />
of THB10.60, based on 3.6x FY13 P/BV, which is equivalent to a 10% discount<br />
to the average P/BV of its peers AIT and SAMART. While <strong>Loxley</strong> is an integrated<br />
ICT contractor, just like AIT and SAMART, we think the discount is reasonable,<br />
taking into account that <strong>Loxley</strong> is a diversified conglomerate, compared to its<br />
pure ICT peers. The discount also accounts for its relatively lower profitability,<br />
compared to its peers.<br />
6.6<br />
159<br />
5.6<br />
139<br />
4.6<br />
119<br />
Forecasts and Valuations Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F<br />
3.6<br />
99<br />
Total turnover (THBm) 10,413 14,248 14,279 18,303 20,765<br />
2.6<br />
26-Mar-12<br />
25-May-12<br />
26-Jul-12<br />
Source: Bloomberg<br />
26-Sep-12<br />
27-Nov-12<br />
28-Jan-13<br />
79<br />
Recurring net profit (THBm) 367 307 526 669 847<br />
Recurring net profit growth 18.2% (16.4%) 71.5% 27.1% 26.7%<br />
Core EPS (THB) 0.18 0.15 0.26 0.33 0.40<br />
Core EPS growth 18.2% (16.4%) 71.5% 27.1% 18.8%<br />
DPS (THB) 0.05 0.08 0.15 0.19 0.21<br />
Dividend Yield 0.8% 1.1% 2.3% 2.9% 3.3%<br />
Core P/E (x) 35.7 42.7 24.9 19.6 16.5<br />
Return on average equity (3.5%) 7.5% 12.6% 12.7% 13.2%<br />
P/B (x) 3.34 3.24 3.05 2.09 2.26<br />
EV/EBITDA (x) 18.3 12.6 17.9 15.6 11.3<br />
Net debt to equity 13.8% 49.4% 88.3% 36.8% 39.9%<br />
RHBRI vs consensus EPS<br />
Source: Company data, RHBRI estimates<br />
RHB Research | See important disclosures at the end of this report<br />
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from<br />
www.rhbinvest.com<br />
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RHB Research 06 Mar 2013<br />
COMPANY BACKGROUND<br />
Brief history. <strong>Loxley</strong> began as a trading company in 1939 under the name <strong>Loxley</strong> Rice Company<br />
(Bangkok), as a JV between Ng Yok Long Lamsam and WR <strong>Loxley</strong> of Hong Kong. The original<br />
activities were the export of rice and lumber. By 1957, its main business shifted to selling imported<br />
industrial products, including those with advanced technology of the day. On 1 April 1993, it went<br />
public under the name of <strong>Loxley</strong> Public Company Limited, and was subsequently listed on the Stock<br />
Exchange of Thailand on 25 Jan 1994. Today with dozens of subsidiary and associated investments,<br />
its business activities can be divided into four main business groups namely: i) ICT and projects, ii)<br />
trading, iii) services, and iv) joint ventures and associate investments. <strong>Loxley</strong>’s ICT and project<br />
business can be broken down into three subdivisions: i) ICT and telecommunications, ii) projects,<br />
and iii) technology.<br />
An integrated ICT contractor. Despite having diversified exposure in several core segments, we<br />
think <strong>Loxley</strong> can be more appropriately classified as an integrated ICT & telecom-related contractor,<br />
where around 70% of its revenue is from the ICT business segment. With a growing ICT backlog,<br />
its exposure to the ICT sector is set to increase further to the point where the segment will<br />
continue to be the key driver for the company’s future growth.<br />
Figure 1: <strong>Loxley</strong>’s business and organizational structure<br />
Source: Bloomberg<br />
RHB Research | See important disclosures at the end of this report<br />
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from<br />
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RHB Research 06 Mar 2013<br />
SEGMENTAL OVERVIEW<br />
ICT & PROJECT BUSINESS<br />
ICT & Telecom business<br />
The ICT business is divided into two business divisions comprising Telecommunications and<br />
Computer products. The Telecommunications unit is responsible for complete telecommunications<br />
infrastructure services, telecommunications equipment distribution and wireless broadband internet<br />
services, while the Computer Products division is responsible for IT installations for the government<br />
as well as private sector. Apart from that, it has reoccurring revenues for the maintenance,<br />
expansion and modification of systems nationwide. <strong>Loxley</strong> is expected to help maintain ToT’s 3G<br />
Phase 1 network as part of a concession, as well as for a submarine cable in the Gulf of Thailand<br />
which connects up the country’s gas rigs that stretches to the Songkla province in the South of<br />
Thailand.<br />
Figure 2: <strong>Loxley</strong>’s products and services offered under its ICT business<br />
Computer and Telecommunication products and software sales<br />
Wireless Broadband Solutions & Products<br />
IT Total Solution Provider, Internet System Integration, Outsourcing, e-Service, e-Biz<br />
Consulting/IT Training, Web-based Integration System Management<br />
Provides e-Learning service<br />
Provides complete solutions for e-Commerce, information security, ATM and smart cards<br />
Teleservice Solution Provider, call center service, telemarketing service<br />
Provides Satellite Images, GIS software system and service<br />
Developed and delivered many computer systems and services to government and public<br />
sectors in finance, automotive, heavy industry, hospital, manufacturing, chemical, education,<br />
entertainment, transportation and electronics<br />
Provides the real-time integrated services for fleet management, which covers real-time<br />
tracking, driving route setting and driving behavior, and also combines GSM networks, GPS<br />
Satellites and Digital Map technologies for call center monitoring<br />
Develops and offers sales management system under the name of MCE (Mobile Convergence<br />
Expert)<br />
Distributes products and services in site survey, system design, procurement, installation,<br />
test, commissioning and warranty for large scale telecommunication systems including fiber<br />
optic, microwave, satellite earth station, mobile SNG and base station systems for mobile<br />
phones.<br />
Front-end survey application for automobile claim services. The system provides all the<br />
necessary applications and synchronizes the information amongst all the three involved<br />
parties, namely, the call center, the claim agent and the claim expert.<br />
Sales data synchronization application between handheld mobile devices to the corporate<br />
computer network via advanced communication technologies<br />
Design and implement open source software for government agencies and corporations<br />
Source: <strong>Loxley</strong><br />
Project business<br />
<strong>Loxley</strong> is involved in operations such as TV and Radio communications, energy processes, electrical<br />
systems and waste water management, amongst others. These are all assigned by the government<br />
and usually awarded in an auction. The company’s project business broadly encompasses all that is<br />
not related to telecommunications and is mostly ICT-related. Currently, its project business comes<br />
from government institutions. It is the representative of authorized dealers of TV and radio<br />
transmitter equipment, as well as equipment associated with TV and radio broadcasting such as<br />
Studio. The company is also a systems integrator for large bidding projects. This includes<br />
designing, installing and building radio and TV stations for government agencies, state enterprises<br />
and private organizations.<br />
RHB Research | See important disclosures at the end of this report<br />
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from<br />
www.rhbinvest.com<br />
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RHB Research 06 Mar 2013<br />
Technology business<br />
For its technology division, <strong>Loxley</strong> provides services and procures technology products, e.g. it is a<br />
3G mobile service reseller and distributes mobile phones and related products as well. It also<br />
provides services and sales of printing products, installs systems for expressway management and<br />
railway, as well as provides real estate management services. The company was chosen by ToT to<br />
be a 3G mobile phone ‘reseller’ or a Mobile Virtual Network Operator (MVNO) and is licensed by the<br />
National Broadcasting and Telecommunications Commission (NBTC) to operate under the Type 1<br />
telecommunications service. Its iKool Real 3G mobile service brand has been operating for two<br />
years, albeit at a loss. <strong>Loxley</strong> has been selling mobile phone devices and is the distributor of Sony<br />
Ericsson phones and is also an importer and distributor of tablets from Apple as well as other<br />
brands.<br />
TRADING BUSINESS<br />
The group’s trading division engages in manufacturing and distribution of equipment for the<br />
consumer, industrial chemical, computer, and telecommunications industries. It also distributes<br />
construction equipment and services, as well as automobile and other specialized procurement<br />
services.<br />
Figure 3: Products under <strong>Loxley</strong>’s trading division<br />
Source: <strong>Loxley</strong><br />
SERVICE BUSINESS<br />
The group offers security services at the Suvarnabhumi Airport, security equipment and systems<br />
for office buildings, hotels, and hospitals, as well as businesses in media, education and<br />
entertainment. Its trading business is anchored by Asia Security Management (ASM), a JV between<br />
<strong>Loxley</strong> and ICTS Europe Holdings, a leading security provider in Europe.<br />
RHB Research | See important disclosures at the end of this report<br />
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from<br />
www.rhbinvest.com<br />
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RHB Research 06 Mar 2013<br />
JV BUSINESS<br />
BP-Castrol (45%)<br />
<strong>Loxley</strong> has partnered with BP Oil to jointly form a business that manufactures and distributes<br />
engine lubricants for the CASTROL and BP brands. While both products have different market<br />
potential, they are both well-perceived. As raw materials are mostly sourced from Thailand, there is<br />
some security to the supply chain, and the product costs incurred may be potentially lower<br />
periodically. BP Castrol (Thailand) is among the top five leaders, commanding a 65% market share,<br />
while the remaining 35% is split among 200 small domestic brands.<br />
Thai Fiber Optics (40%)<br />
Thai Fiber Optics Co (TFOC) is a JV with Bangkok Telecom, a leading copper telephone cable<br />
manufacturer in Thailand which offers fibre optics design and manufacturing services supervised by<br />
world leader Furakawa Electric of Japan. TFOC has been involved in projects to install 3G<br />
infrastructures for ToT’s Phase1 network, broadband internet and WIFI networks. The company will<br />
supply materials for the network should <strong>Loxley</strong> win the project for Phase 2 of its expansion.<br />
BlueScope Steel & BlueScope Lysaght (25%)<br />
BlueScope Steel (Thailand) and BlueScope Lysaght (Thailand) are JVs between <strong>Loxley</strong> Plc and<br />
BlueScope Steel. BlueScope is an Australian world leader in coated steel and has its largest<br />
overseas investment in Thailand, where it manufactures and distributes zinc-coated steel, prepainted<br />
steel and aluminium/zinc alloy-coated steel. The company’s steel production plant is<br />
located at Map Ta Phut and includes metallic coating lines and a painting operation. This plant is<br />
the sole manufacturer of ZINCALUME, which provides a protective barrier for zinc alloy-coated steel<br />
and has up to four times the life of galvanized steel. CRP ANTIBACTERIAL, another Thai innovation,<br />
is a pre-painted galvanized steel product specially designed for a cool room panel application for<br />
the food industry. The product is designed to meet USDA requirements.<br />
L Solar 1 (45%)<br />
The company has been constructing its 8.7MW solar energy power plant on 215 rai of land in<br />
Bothong District, Kabinburi, Prachinburi where generation capability is 11m-12m kWh. The<br />
company’s operations are supported by the government, e.g. promotions for investments in the<br />
solar energy power plant by the Board of Investment of Thailand (BOI), with additional benefits<br />
from the Provincial Electricity Authority (PEA) for renewable energy producers. <strong>Loxley</strong> can also<br />
supply power transmission lines from solar panels to the Provincial Electricity Authority (PEA), and<br />
provide consultations as well as install equipment for private solar farms.<br />
<strong>Loxley</strong> GTECH Technology (LGT)<br />
The company is a JV between <strong>Loxley</strong> and GTECH Corporation group. It is the provider of the Online<br />
Lottery System Service Contract for the Government Lottery Office (GLO). The contract includes<br />
the design, procuring, implementing and operating of the Online Lottery System. The system<br />
consists of the two Data Centers (one for primary and the other for backup), an online<br />
communication network system, and the installation of terminals to retailers selected by GLO. The<br />
lottery contract was signed in 2006. LGT invested THB2bn in machine installation. The company will<br />
receive 75 satang in returns per transaction. Lottery ticket sales total THB3bn per draw, which<br />
translates into a profit of THB1.5bn a year.<br />
RHB Research | See important disclosures at the end of this report<br />
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from<br />
www.rhbinvest.com<br />
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RHB Research 06 Mar 2013<br />
FINANCIALS<br />
ICT & projects the biggest revenue contributor. In FY12, <strong>Loxley</strong>’s ICT & projects segment<br />
contributed the lion’s share to the group’s topline, accounting for about 67% of total revenue. This<br />
was followed by its trading and services segments which contributed about 27% and 6% of the<br />
total revenue respectively. Revenue contribution from ICT & projects has been on an uptrend over<br />
the last few years, up from 50% of total revenue in FY08 to 67% last year, owing to the higher<br />
backlog as the company secured more contracts. While the ICT & projects segment recorded a<br />
8.8% y-o-y growth in FY12, the group’s total revenue was relatively unchanged y-o-y due to the<br />
16.1% y-o-y contraction in revenue from its trading business, partly due to the impact from the<br />
devastating floods in late 2011.<br />
Figure 4: FY12 revenue breakdown<br />
Source: <strong>Loxley</strong><br />
Figure 5: Historical breakdown of revenue by segment since 2008<br />
Source: <strong>Loxley</strong><br />
JVs the biggest bottomline contributor in FY12. On the whole, <strong>Loxley</strong>’s subsidiaries did not<br />
contribute any EBIT for FY12. However, according the notes to its financial statements, there are<br />
slim margins of around 3% for its key ICT & projects business, as well as for its services segment.<br />
Its trading division appeared to be in the red, partly due to the impact from the post-flood crisis<br />
coupled with the extremely thin margins characteristic of this business. As such, all of <strong>Loxley</strong>’s net<br />
profit in FY12 came from its JV and associates business, driven by strong earnings growth from BP<br />
Castrol, BlueScope and L-Solar 1. In FY12, <strong>Loxley</strong>’s JV and associate companies generated a total<br />
net profit of THB2.2bn, of which THB702m was earnings from its equities.<br />
RHB Research | See important disclosures at the end of this report<br />
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RHB Research 06 Mar 2013<br />
Figure 6: Total and equity profit from <strong>Loxley</strong>’s JV and associate companies in FY12<br />
Source: <strong>Loxley</strong><br />
Figure 7: Equity profit structure from <strong>Loxley</strong>’s JV and associate companies in FY12<br />
Source: <strong>Loxley</strong><br />
Decent balance sheet with room for improvement. At a D/E ratio of 1.8x as at end-FY12,<br />
<strong>Loxley</strong>’s balance sheet was relatively highly-geared due to its high borrowings to finance its<br />
expansion and investments. Nevertheless we think the balance is decent enough, and has some<br />
scope for further improvement as the company explores other avenues to raise capital for future<br />
expansion and investments, such as through the upcoming public offering (PO) of 165m new<br />
shares which is expected to raise about THB1bn. The proceeds from the PO will be utilized for<br />
additional project investments both locally and abroad, as well as to fund working capital.<br />
Figure 8: <strong>Loxley</strong>’s consolidated balance sheet for FY12<br />
Source: <strong>Loxley</strong><br />
RHB Research | See important disclosures at the end of this report<br />
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from<br />
www.rhbinvest.com<br />
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RHB Research 06 Mar 2013<br />
KEY INVESTMENT HIGHLIGHTS<br />
SURFING HIGH ON ICT BOOM<br />
Strong backlog with further upside to grow. As at early-FY13, <strong>Loxley</strong>’s ICT & Projects backlog<br />
stood at around THB8bn. 70% of it will be recognized as revenue in FY13 due to the short-term<br />
nature of the ICT contracts. <strong>Loxley</strong> has also identified THB28bn worth of high-potential prospective<br />
projects from its existing and new clients where it stands a good chance of winning them. Among<br />
them are ToT’s 3G infrastructure roll-out Phase 2 worth THB10bn, as well as a THB9bn fibre optics<br />
project in Myanmar. It also has indentified the THB4.5bn Water Resources Management Platform<br />
(WRMP) project, which is part the government’s THB350bn flood prevention and management<br />
initiative. WRMP will involve centralizing and implementing the country’s water management via a<br />
desktop computer, whether it is increasing water flows to agricultural fields in the Central Plains or<br />
diverting water to the sea from retention centers. Supported by its strong working relationship with<br />
its government agency clients, we believe <strong>Loxley</strong> should be able to win some of those high potential<br />
projects and thus further expand its backlog. Apart from high revenue visibility arising from the<br />
high backlog, the company should be able to benefit from economies of scale, especially in<br />
procuring devices and technology.<br />
Figure 9: Breakdown of <strong>Loxley</strong>’s current THB8bn ICT & Projects backlog<br />
Source: <strong>Loxley</strong><br />
Figure 10: Strong ICT backlog with plenty of room to grow<br />
Source: <strong>Loxley</strong><br />
RHB Research | See important disclosures at the end of this report<br />
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RHB Research 06 Mar 2013<br />
Smart Thailand project. <strong>Loxley</strong> is also eyeing some portion of the government’s THB80bn ICT<br />
infrastructure project aimed at improving the broadband network across the country, known as the<br />
Smart Thailand project. Under the project, the government aims to expand the coverage of<br />
broadband network to 80% of the population in three years, and 95% of the population by 2020.<br />
The project is divided into two phases. The first phase, which is set to kick-start this year and be<br />
completed in 2015, will involve upgrading the existing telecom networks to reach 80% of the total<br />
population. The second phase, which will span from 2016 until 2020, will entail the installment of<br />
broadband network in areas where fibre-optic network is not yet available. Under the Smart<br />
Thailand project, the fibre optic network will be used as the main broadband network nationwide,<br />
including in public areas such as schools, hospitals and government places, while the Internet<br />
connection will be provided at affordable costs or free of charge. In addition, the government will<br />
initiate free Wi-Fi projects in collaboration with service providers to offer the service in remote<br />
areas. In view of its strong track record, we think <strong>Loxley</strong> stands a good chance of being selected to<br />
participate in the rollout of the Smart Thailand project.<br />
Benefiting from massive 3G investment. In preparation for Thailand’s first 3G wave, the<br />
government has allocated THB7.6bn for the ICT sector in FY13, up 102% y-o-y. While the amount<br />
may be small, it signals the government’s increasing attention on the sector, which has high<br />
potential for growth. We believe the budget for the sector will continue to grow in the future, as<br />
state telcos and private players are ramping up upgrades on their existing networks. As such, we<br />
think <strong>Loxley</strong>, being one of the leading players in the field coupled with its strong track record and<br />
experience, stands to benefit from the new systems integration and upgrading works of existing<br />
systems.<br />
Figure 11: Timeline of TOT’s 3G installation<br />
Source: SAMART<br />
Digital TV. According to Thailand’s latest National Radio and Television Broadcasting Act, there is a<br />
possibility that broadcasting will move to digital technology. This will help stimulate broadcasters to<br />
expand their businesses by going digital. In this sense, the potential for growth is vast. The shift in<br />
broadcasting devices to digital TV systems for five networks in Thailand is estimated to be worth<br />
around THB15bn. Moreover, the government controls the majority of TV stations and <strong>Loxley</strong> has a<br />
high chance of winning a good deal of the bids. Customers include the Public Relations Department,<br />
Royal Thai Army Radio and Television, MCOT Pcl, Parliament Radio and Television Station and the<br />
Military’s broadcasting channel as well as the Military Development Office.<br />
New opportunities in neighbouring countries. Supported by its vast experience in the<br />
domestic ICT sector, <strong>Loxley</strong>’s management sees opportunities to provide ICT services abroad as<br />
part of its expansion strategy. It is collaborating with AIT in a 50:50 joint venture named <strong>Loxley</strong> &<br />
AIT Holdings Co Ltd, which will be investing in new projects abroad as well as at home. One of<br />
these is the THB9bn fibre optic cable project in Myanmar, which is expected to be finalized soon.<br />
Other than that, <strong>Loxley</strong> is also keeping an eye on potential ICT projects in Cambodia, Vietnam and<br />
Laos.<br />
RHB Research | See important disclosures at the end of this report<br />
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from<br />
www.rhbinvest.com<br />
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RHB Research 06 Mar 2013<br />
FAVOURABLE OUTLOOK FOR TRADING BUSINESS<br />
Construction materials trading division to benefit from construction boom. Currently, the<br />
backlog for its construction materials trading division stands at THB2.74bn, most of which comes<br />
from mass transit-related projects. As a leading construction materials trading company in<br />
Thailand, <strong>Loxley</strong> is expected to reap benefits from a booming construction sector in Thailand as well<br />
as the expansion of the mass transit routes in the Greater Bangkok region. Apart from the domestic<br />
construction materials market, it has also cast its sights on the opportunities in supplying<br />
construction materials to tap into the construction boom in Myanmar.<br />
Bringing Thai brands to China. <strong>Loxley</strong>’s China office has been helping Thailand’s small and<br />
medium enterprises (SMEs) to introduce their products to the Chinese market. As it is not very<br />
cost-effective for Thai SMEs to self-market their products overseas, <strong>Loxley</strong> provides the distribution<br />
channels by leveraging on its existing network in China. To further tap into the vast Chinese<br />
market, it plans to set up booths marketing Thai products in petrol stations in China by this year.<br />
As such, <strong>Loxley</strong> is expected to sign a co-operative agreement with Sinopec to create a “Thai corner”<br />
in the latter’s petrol stations in China. The booths will sell products from both <strong>Loxley</strong> and Thai<br />
SMEs. As Sinopec has over 10,000 petrol stations located across four provinces and two cities in<br />
China, we think the co-operation with Sinopec will widen <strong>Loxley</strong>’s distribution network in China.<br />
Figure 12: Sinopec’s petrol stations network in China<br />
Source: <strong>Loxley</strong><br />
UNLOCKING VALUE VIA LISTING ITS SUBSIDIARY<br />
Over the next five years, <strong>Loxley</strong> is likely to list some of its subsidiaries if they show attractive<br />
enough profits. This is an incentive for the company to improve its cost-saving measures, or it may<br />
have to raise more working capital to adequately partake in the array of opportunities available. We<br />
do not rule out the possibility that the listing process might begin by end-FY13. Two of <strong>Loxley</strong>’s<br />
subsidiaries, <strong>Loxley</strong> Wire Company (LWC) and LOXBIT, are the prime candidates for listing on the<br />
SET.<br />
<strong>Loxley</strong> Wireless Company<br />
<strong>Loxley</strong> Wireless is a 99%-held subsidiary. We believe that this company is a prime candidate for<br />
listing on the SET. <strong>Loxley</strong> actually has several potential candidates to be floating on the stock<br />
market, and is likely to follow the same path as Samart in listing its business units are that deemed<br />
practical in unlocking value for providing an additional catalyst for its share price.<br />
LWC’s business is divided into three main areas:<br />
i) Distribution of carrier-grade equipment by Huawei and Alcatel-Lucent as well as Aastra’s<br />
enterprise product, e.g. PABX including installation and after-service.<br />
2) Distribution of wireless transmission and networking hardware such as radio frequency repeaters<br />
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RHB Research 06 Mar 2013<br />
and dead signal area antennas.<br />
3) High speed data communications for the corporate world. This was a business that LOXLEY<br />
retained when it sold off its holdings in what is now CS Loxinfo to Thaicom (THCOM). They also<br />
install CCTVs and Virtual Private Networks (VPN).<br />
LWC’s business is similar to Advanced Info Technology (AIT)’s except that AIT focuses on one<br />
supplier, CISCO. AIT provides inroads into strong relationships with the public sector in exchange<br />
for being the key partner for CISCO products in Thailand. Both companies focus primarily on<br />
government-related customers such as the Communications Authority of Thailand (CAT) and the<br />
Telephone Organisation of Thailand (TOT). LWC works, rather than competes, with AIT.<br />
A key on-going project at this time is CAT’s submarine cable system to handle telecommunications<br />
between land and oil rigs in the Gulf of Thailand, stretching 1,340 km and extending to Songkla in<br />
the south of Thailand. The 3G project belonging to the ToT also falls under LWC’s purview.<br />
LOXBIT – IT Specialist<br />
LOXBIT is another prime candidate for a SET listing over the next 18months. The company is a<br />
systems integrator dealing with consumer IT developments and machines for automated processes<br />
such as electronic payments, ATM’s, cheque clearing and achieving systems (ICAS) and for risk<br />
management for the Bank of Thailand. The company provides procurement, installation and longterm<br />
maintenance services as part of its contract. Not surprisingly, it has the largest percentage to<br />
sales for recurring revenues. It also authorizes the manufacturing of products.<br />
Competition for LOXBIT is intense due to the rapid changes in technology and customer<br />
requirements, including new and international standards. However, a positive is that progressive<br />
regulatory rules mean new contracts for modification, for LOXBIT. One competitive advantage for<br />
this company is that it can share the expertise of its pool of highly-experienced engineers and IT<br />
consultants which a smaller company or pure distributor may not have.<br />
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KEY INVESTMENT RISKS<br />
Execution risks. <strong>Loxley</strong>, as a leading ICT player, will benefit from the massive investments being<br />
pumped into the sector in Thailand as well as the region. While there are no concerns over its<br />
ability to grow its backlog, its ability to turn its new backlog into earnings remains rather<br />
questionable judging from its past track record. The historical gross profit margin for the company<br />
had been decent at around 15%-18%. However, high selling and administrative expenses have<br />
dragged down profitability. The same can also be said about its trading and services segments. As<br />
such, we believe that the concerns over the company’s execution risks are rather valid.<br />
Uncertainties over the online lottery project. The online lottery project was part of former<br />
prime minister Thaksin Shinawatra’s policy to clamp down black market lotteries, legalizing it while<br />
generating additional revenue for the government. <strong>Loxley</strong>’s JV company, LGT, was given the award<br />
to roll out the installation of the online lottery back in 2006. Due political turmoil, the<br />
implementation of online lottery has been delayed indefinitely. So far, LGT has invested around<br />
THB1.5bn, with 6000 machines installed nationwide. While the current government plans to<br />
proceed with the roll out of the online lottery, there are still uncertainties over the actual execution<br />
given the politically-sensitive nature of the issue. While the company has set aside some provisions<br />
in the event that the project gets scrapped, we think there is always a possibility that the<br />
provisions are insufficient and it may need to inject additional funds into the investment. Even so,<br />
the negative news flow in regard to the potential cancellation of the project will result in pessimistic<br />
sentiment on the stock price.<br />
Political risks. Given that most of <strong>Loxley</strong>’s ICT contracts are from the government and<br />
government agencies, the contracts flows are highly dependent on the political stability whereby<br />
any change in political leadership could hamper the progress in awarding these contracts. As such,<br />
we think <strong>Loxley</strong>’s high dependency on government-related contracts expose the company to<br />
political risks, and under a less-than-ideal situation, it might not being able to replenish its backlog<br />
due to the delay in the implementation of government projects.<br />
Heavy balance sheet and earnings dilution. Due to the company’s high borrowings, it incurred<br />
a rather significant finance cost amounting to over THB230m in FY12. While its operating gross<br />
profit margin was rather healthy and comparable to its peers, its high finance costs have been<br />
eating into its bottomline over the last few years. We believe its highly-geared balance sheet leaves<br />
the company limited room to gear up further, in the event it needs to raise capital. While the<br />
proposed PO could provide additional capital for the company without having to increase its<br />
borrowings, we think it is very important for the company to channel the proceeds into earningsaccretive<br />
projects to minimize the impact of the earnings dilution from the enlarged share base.<br />
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FORECAST & RECOMMENDATION<br />
Decent top- and bottomline growth. We expect revenue to grow by about 28% y-o-y in FY13,<br />
largely driven by the strong revenue recognition from its existing ICT & projects backlog as well as<br />
from new contract wins. As such, the ICT & projects segment is set to remain its biggest revenue<br />
contributor, bringing in over 70% of its total revenue. <strong>Loxley</strong>’s trading and service businesses<br />
contribute less than 30% to its total revenue. We expect the gross margin for its core business to<br />
improve slightly in FY13, with further improvements in FY14 onwards as the company achieves<br />
greater economic of scales from the high backlog of its ICT business segment. Overall, we expect<br />
net profit to grow at around 27% over the next few years, in line with revenue growth as well the<br />
higher equity profit contributions from its JVs and associate companies. Conservatively, we have not<br />
factored in contributions from its online lottery business in our forecast due to the uncertainties<br />
surrounding the issue.<br />
Initiate with TRADING BUY. We initiate coverage on <strong>Loxley</strong> with a Trading Buy call and a FV of<br />
THB10.60, based on 3.6x FY13 P/BV. This is equivalent to a 10% discount to the average P/BV of<br />
its peers AIT and SAMART. While <strong>Loxley</strong> is an integrated ICT contractor just like AIT and SAMART,<br />
we think the discount is reasonable, taking into account its position as a diversified conglomerate<br />
compared to its peers, who are pure ICT players. The discount also factors in its relatively lower<br />
profitability compared to its peers. Nevertheless, as one of the leading ICT contractors, we think<br />
<strong>Loxley</strong> is set to benefit from the sector’s favourable outlook, supported by the abundance of highpotential<br />
opportunities available. However, the execution risk it faces in turning the high backlog<br />
into profit remains a key concern.<br />
Figure 3: <strong>Loxley</strong>’s P/BV trading band since 2003<br />
Source: Bloomberg<br />
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FINANCIAL<br />
Profit & Loss (THBm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F<br />
Total turnover 10,413 14,248 14,279 18,303 20,765<br />
Cost of sales (8,652) (12,087) (12,093) (15,530) (17,452)<br />
Gross profit 1,761 2,160 2,185 2,773 3,313<br />
Gen & admin expenses (1,749) (1,946) (2,016) (2,260) (2,542)<br />
Other operating costs (181) (206)<br />
Operating profit 12 214 169 332 565<br />
Operating EBITDA 135 343 312 479 720<br />
Depreciation of fixed assets (123) (128) (143) (147) (155)<br />
Operating EBIT 12 214 169 332 565<br />
Net income from investments 357 376 701 750 750<br />
Interest expense (115) (158) (232) (240) (250)<br />
Exceptional income - net (343) (12) - - -<br />
Pre-tax profit (89) 420 638 842 1,065<br />
Taxation (42) (115) (115) (168) (213)<br />
Minority interests (8) (7) 3 (5) (5)<br />
Profit after tax & minorities (139) 298 526 669 847<br />
Net income to ord equity (139) 298 526 669 847<br />
Recurring net profit 367 307 526 669 847<br />
Source: Company data, RHBRI<br />
Balance Sheet (THBm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F<br />
Total cash and equivalents 869 983 560 2,301 2,127<br />
Inventories 665 1,316 1,233 1,504 1,706<br />
Accounts receivable 2,332 2,208 1,885 2,356 2,632<br />
Other current assets 1,106 2,726 4,196 4,510 5,064<br />
Total current assets 4,973 7,233 7,874 10,671 11,530<br />
Total investments 3,563 3,572 3,974 4,045 4,145<br />
Tangible fixed assets 975 1,066 1,121 1,177 1,236<br />
Intangible assets 36 45 57 58 58<br />
Total other assets 247 336 303 320 333<br />
Total non-current assets 4,820 5,019 5,456 5,600 5,772<br />
Total assets 9,793 12,252 13,330 16,271 17,302<br />
Short-term debt 1,117 1,956 3,214 3,300 3,400<br />
Accounts payable 1,796 2,827 2,001 2,573 2,919<br />
Other current liabilities 1,988 1,610 1,785 1,991 2,195<br />
Total current liabilities 4,901 6,393 7,000 7,864 8,515<br />
Total long-term debt 324 1,129 1,323 1,386 1,428<br />
Other liabilities 433 475 505 549 594<br />
Total non-current liabilities 757 1,604 1,829 1,935 2,022<br />
Total liabilities 5,658 7,996 8,828 9,799 10,537<br />
Share capital 2,000 2,000 2,000 2,265 2,265<br />
Retained earnings reserve 366 551 905 1,173 1,511<br />
Other reserves 1,554 1,496 1,395 2,833 2,786<br />
Shareholders' equity 3,920 4,047 4,300 6,270 6,563<br />
Minority interests 215 209 202 202 202<br />
Other equity - (0) (0) (0) (0)<br />
Total equity 4,135 4,256 4,502 6,472 6,765<br />
Total liabilities & equity 9,793 12,252 13,330 16,271 17,302<br />
Source: Company data, RHBRI<br />
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Cashflow (THBm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F<br />
Operating profit 12 214 169 332 565<br />
Depreciation & amortisation 123 128 143 147 155<br />
Change in working capital 1,425 (1,529) (1,865) (359) (583)<br />
Other operating cashflow (1,063) 451 (74) 391 464<br />
Operating cashflow 497 (734) (1,628) 511 601<br />
Interest received 7 11 10 20 20<br />
Interest paid (115) (158) (232) (240) (250)<br />
Dividends received 348 364 374 375 375<br />
Tax paid 3 (132) (106) (163) (211)<br />
Cashflow from operations 739 (651) (1,582) 503 535<br />
Other investing cashflow 97 119 154 270 236<br />
Cashflow from investing activities 97 119 154 270 236<br />
Dividends paid - (100) (150) (300) (381)<br />
Proceeds from issue of shares - - - 1,155 -<br />
Increase in debt (875) 1,643 1,453 - -<br />
Other financing cashflow 544 (809) (247) 210 273<br />
Cashflow from financing activities (331) 735 1,056 1,065 (108)<br />
Cash at beginning of period 594 857 976 558 2,299<br />
Total cash generated 506 203 (372) 1,838 663<br />
Implied cash at end of period 1,099 1,060 604 2,397 2,962<br />
Source: Company data, RHBRI<br />
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RHB Guide to Investment Ratings<br />
Buy: Share price may exceed 10% over the next 12 months<br />
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain<br />
Neutral: Share price may fall within the range of +/- 10% over the next 12 months<br />
Take Profit: Target price has been attained. Look to accumulate at lower levels<br />
Sell: Share price may fall by more than 10% over the next 12 months<br />
Not Rated: Stock is not within regular research coverage<br />
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