Yongnam Holdings

UOBKayhian on 9 Apr 2013

Valuation/Recommendation

·      Upgrade to BUY with a higher target price of S$0.40, based on 9x 2013F PE, pegged to Singapore-listed peers’ average.

What’s New 

·      Yongnam Holdings recently announced it has joined a consortium comprising JGC Corporation and Changi Airport Planners and Engineers Pte Ltd to evaluate a project tender for the construction and management of Hanthawaddy International Airportin Myanmar. According to management, the Ministry of Transport of Myanmar has prequalified seven firms for the project and the tender submission will be in April.

·      In addition, Yongnam said it will be diversifying into investing in infrastructural developments locally and overseas either through joint ventures and/or strategic alliances. This is to complement its existing business of providing structural steelworks, specialist civil engineering and mechanical engineering services in Singapore.

Our View

·      We view the move as positive as the construction industry in Singapore has been hit hard by rising labour costs and keen competition from foreign players. Yongnam currently derives 85% of its revenue from Singapore. With this diversification, Yongnam will be able to enjoy recurring income from infrastructure developments investment rather than lumpy project earnings recognition. But Yongnam remained tight-lipped on the potential size of the contract as well as the recurring income it will enjoy as it is still evaluating the project.

·      Yongnam has also conveyed to investors in the last results briefing the challenges within the construction industry. In 2012, revenue fell 9.4% yoy to S$301.6m and net profit dropped 31.3% yoy to S$43.5m due to project delays and a lower hit rate from project bidding. Yongnam only clinched S$240m worth of projects out of S$1.3b bidded as it is unwilling to take on low-margin projects.

·      However, we believe the construction pipeline remains healthy with many projects, such as the NTU Undergraduate Hall of Residence, the Energy Market Authority’s fourth storage tank for a LNG terminal at Jurong Island and JTC’s very large floating structure at Pulau Sebarok. As for the higher-margin specialised engineering segment, the group is looking to secure projects within the Singapore’s MRT Thomson Line, Hong Kong’s MTR and Kuala Lumpur’s metro lines. As at 31 Dec 12, Yongnam’s orderbook stood at S$400.6m, of which 78% will be recognised in 2013.