Tiong Woon Corporation

UOBKayhian on 31 Aug 2012

Valuation
· Tiong Woon is trading at a 50% discount to its book value of 47.8 cents with a dividend yield of 1.7%.
Our View
· We only expect margins to improve in 1HFY13 from an increased in both utilisation rate and rental rates. We believe that operating margin from the Heavy Lift fell from 5.5% in FY11 to 2.7% in FY12 as the group had to cope with depressed rates and rising costs. With the demand from infrastructure projects rising in the region, rental rates have normalised to 85% and utilisation rate is also expected to improve from the current 66% to 80% for FY13.
· Tiong Woon is also actively seeking opportunities in the emerging markets after setting up a representative office in Myanmar and securing one contract to supply heavy equipment for a pipeline-laying project there. For Vietnam, Tiong Woon has a JV with Chi Deh Crane Engineering and Giant Project Service Corp to target steel-related infrastructure projects going forward.
· The Fabrication & Engineering business continued to be in the red of S$5.9m from higher subcontractor and equipment rental costs as well as an impairment loss of S$1.5m on trade receivables. Management revealed that contracts for newbuild of marine vessels are hard to come by due to a lack of track record despite fulfilling many of the specifications. The group is running at an operating cost of S$0.5m per month and is considering of downsizing the 65ha operations in Bintan.
Financials Highlights
· Tiong Woon reported a loss of S$4.8m in FY12 from a profit of S$0.9m last year. This is despite a 41% increase in revenue to S$151.2m, driven by a rise in revenues from all business segments.
· Revenue from Heavy Lift and Haulage grew 34% yoy to S$114.8 million as the group took on larger integrated projects. However, pre-tax profit was only S$0.2m (FY11: S$5.0m) as it had to make provision of S$3.4m for impairment loss on trade receivables. We understand from management that these receivables were mainly from a series of customers in India’s oil & gas sector. Marine Transportation’s revenue jumped 70% yoy to S$16.4m from an increased utilisation rate of its tugboats and barges. Pre-tax profit for the segment was S$1.7m compared to a loss of S$0.2m in FY11 partly due to a contribution of S$0.8m from associated companies.
· The group also generated positive net cash flow from operations of S$35.5m for FY12 and has S$22.8m cash.