Yongnam Holdings

UOBKayhian on 16 Aug 2012

Valuation/Recommendation
· Maintain HOLD and target price of S$0.27, based on a 3-year historical average PE peg of 6.5x on our 2012F EPS of 4.1 cents.
· Yongnam Holdings (Yongnam) reported a disappointing set of earnings that resulted in an average reduction of 2012 consensus net profit forecast of almost 20%, with two target price cut and one recommendation downgrade from four other brokers.
· This also reaffirms our view that the group is likely to face challenges in securing significant contract wins going forward as we maintain our 2012 and 2013 net profit forecasts of S$55.5m and S$54.7m respectively.

Financial Results
· Yongnam reported a second yoy drop in net profit to S$12.1m (-19.7% yoy) for 2Q12, citing lower revenue and compressed margins. Revenue declined 5.4% yoy S$78.1m as it completed several structural steelworks projects, such as Garden by the Bay and Vista exchange, resulting in a 24.2% decrease in this segment’s revenue. Gross margin was also lower at 26.3% (2Q11: 29.6%).
· To fill capacity, Yongnam reiterated it will actively pursue infrastructural projects like airport terminals and MRT projects in addition to commercial projects in countries like Singapore, Hong Kong, Malaysia, India, Indonesia and the Middle East. Orderbook stood at S$475.0m as at 30 Jun 12, of which 35% is expected to complete in 2012.

Share Price Catalysts
· Sustainable contract wins for the rest of the year. In 2Q12, Yongnam had secured contracts worth S$82.5m, comprising structural steelwork contracts for a new commercial development at Market Street, the revamp of a major shopping mall in the Marina Bay area in Singapore and one specialist civil engineering contract for Hong Kong Express Link Central-Wan Chai Bypass Tunnel in Hong Kong.
· Although the group has updated investors on the potential projects for tendering worth S$740m in Singapore for 2012/13 and S$645m for overseas, it remains to be seen if it can secure these contracts at adequate gross margins given the strong competitive environment.