Yongnam Holdings

Kim Eng on 7 May 2013

OUR recently concluded non-deal roadshow in Singapore drew high levels of interest from institutional fund managers. The Asian infrastructure theme was of relevance, given the unprecedented boom, and Yongnam represents a high- quality play, given its regional market leading position in structural steel and strutting.

In terms of order wins, FY2012 was a weak year, with an estimated $240 million versus recent historical range of $300 million-$500 million. We believe this represents a tactical decision of not compromising on margins rather than a structural decline. Management expects the resumption of major contract wins in the second half of this year, which we think will be positive stock catalysts.

Management agreed with our thesis that free cash flow will improve substantially from this year, with the cessation of a major five-year capital expenditure cycle from FY2008- FY2012. With a naturally cash-generative business and net capex reducing to $25 million a year, we estimate free-cash-flow yield of 18 per cent by FY2015. Management believes existing capacity is supportive of revenue up to $500 million, which would represent 75-80 per cent utilisation.

Yongnam's consortium has submitted the proposal for a BOT (build, operate, transfer) project to expand the existing Yangon International Airport. Given the urgency of the project, tender results could be known within two months. This is a separate bid to build the new Hanthawaddy International Airport. With a potent mix of technical strengths and government relationships, we believe this consortium is amongst the front-runners for both projects.

With the incumbent government's victory in Malaysia, the massive MRT project in Kuala Lumpur is likely to progress with minimum delay. We think Yongnam has a very high chance of securing work. We reiterate "buy" ahead of H2 2013, which is shaping up to be an interesting period with major contract win catalysts in store. Our target price of $0.45 is pegged to 10 times FY2013 forecast PE, with 81 per cent of FY2013 revenue backed by orderbook schedule.

BUY