Tiong Seng Holdings

UOBKayhian on 28 Aug 2012

Valuation
· Tiong Seng Holdings (Tiong Seng) is trading at 5.8x 2011 earnings with a dividend yield of 4.9%. Based on Bloomberg’s consensus estimate, the stock has a 12-month target price of S$0.29 and is set to report S$26.3m of earnings in 2012. Investors should also note that the stock is trading at a 27% discount to its book value of 28.0 S cents.
Investment Highlights
· Tiong Seng recently reported a 5.9% increase in 2Q12 net profit to S$9.7m on strong revenue growth though this was partially eroded by higher construction costs.
· Last week, the company secured a S$137m construction contract for Singapore Institute of Management’s (SIM) campus extension of a four-story Multi-purpose Hall and nine-storey extension to Linear building. This increased its total orderbook to S$1.43b to be completed in the next 12 to 30 months.
· In order to reduce cost and foreign workers reliance, Tiong Seng has started operations of the S$36m Prefab Hub in May with a production capacity of more than 100,000cu m annually. According to management, using pre-cast components can reduce labour requirement by 50-70%.
· As for the property development business in China, the group is in the midst of the construction and sales of a few projects including the Xu Shu Guan project in Suzhou, Equinox, Zizhulin Commercial development and Tianjin Eco-city in Tianjin and lastly Sunny International in Cangzhou.

2Q12 Financial Results
· Revenue grew by 54.9% yoy to S$130.0m as the group was engaged with work on The Wharf Residences, The Volari and NUS Staff Housing at Kent Vale. Tiong Seng also managed to record higher sales of Cobiax products of S$2.6m (+27% yoy) in the quarter.
· However, gross profit slumped 22.3% yoy to S$12.9m with gross profit margins declining almost 10% to 9.9%. This is due to higher construction costs and as the group had recorded no sales from higher-margin development properties. Management also shared that the group has revenue of S$32.8m from newly commenced projects in Singapore to be recognised in the next quarter.

Our View
· According to the Building and Construction Authority, construction demand in 2012 is projected to be between S$21b-S$27b, albeit lower than the S$32b in 2011. In the next two years, the industry is projecting an average construction demand of between S$19b to S$27b p.a..
· However management expects the operating environment to remain challenging in the next two quarters as the industry faces rising material costs, foreign workers’ levies and the influx of competition from foreign contractors.