Yongnam Holdings

UOBKayhian on 16 Jul 2012

Valuation/Recommendation
· Downgrade to Hold with a lower target price of S$0.27. This is based on a 3-year historical average PE peg of 6.5x on our 2012F EPS of 4.1 S cents. The valuation is also not far from the sector average PE of 7x earnings.
· We cut our 2012 and 2013 net profit forecasts to S$55.5m and S$54.7m respectively to factor in the lower contract wins estimate in our forecast. The company also has a policy of paying approximately 15% of net earnings as dividends which we project at 0.67 S cents for 2012.
What’s New
· Yongnam has secured three contracts worth a total of S$63.8m, comprising two structural steel contracts for a commercial development located at Market Street and a major shopping mall in the Marina Bay area; and a specialist engineering project for the Hong Kong Express Link Central-Wan Chai Bypass Tunnel. The tenure of these projects will last through mid-16.
· For the development at Market Street, Yongnam will provide Takenaka Corporation with 7,600 tonnes of structural steel as well as install precast columns and beams whereas for the revamping of the mall in the Marina Bay area, Yongnam will supply Samsung C&T Corporation 3,450 tonnes of structural steel for the construction of new floors and structure. In Hong Kong, Yongnam will undertake the design, supply, erection and subsequent removal of struts between newly constructed diaphragm walls at the East Ventilation Building and Cut-&-Cover Tunnel for the Hong Kong Express Link Bypass Tunnel.
· With these contract wins, Yongnam has secured orders worth a total of S$138.1m as of Jul 12.
Our View
· However, we see downside risks to our earnings forecast as contract wins have been slow for Yongnam in 2012. The group had already secured more than S$200m worth of contracts by this time last year as compared to S$138.1m as of now. Previously we had projected contract wins of S$325m in 2012 and with only five months more to go, these seem a tad too aggressive. Accordingly, we slashed our contract wins forecast to S$260m and S$300m for 2012 and 2013 respectively.
· 1Q12 results may have reflected the challenging working environment ahead. Net profit fell 23.8% yoy to S$11.4m from S$15.0m in 1Q11 due to a 10.0% decline in revenue from delays in two structural steelworks projects and a compression of gross profit margins to 29.3% from 33.2% in the last corresponding period. Although management remains positive on the outlook, they highlighted that strong competition may impact margins going forward.