Yongnam Holdings

Kim Eng on 27 Sept 2012

Caught the right break. As a structural steelwork specialist, Yongnam Holdings was a key beneficiary of the buildup of Marina Bay area between 2007 and 2011, with a surge in net earnings CAGR of 21.8%. Regionally, Yongnam has received kudos and won contracts. To date, it has commanded strong earnings growth, coupled with improving margins. Despite recording less earnings contribution without higher margin private sector projects in 1H12, Yongnam still commands the largest orderbook amidst its peers and is set to further benefit from the healthy pipeline of public contracts coming up. 

Major player in infrastructure industry. Yongnam is a structural steel contractor and specialist civil engineering solutions provider. It owns two steel fabrication facilities in Singapore and Malaysia with a capacity of 78,000 tonnes p.a.. It has an unbeatable track record of winning contracts in all MRT and expressway projects in Singapore. YTD, Yongnam has won SGD137m worth of contracts, with a net order book of SGD496m, up 7.4% since end-2011, of which about 34% is expected to complete this year. 

Margin contraction to be expected. Going forward, margins are expected to normalize without contribution from iconic projects such as Marina Bay Sands. Compare to peers, Yongnam still commands more attractive gross and net margins of 26.3% and 15.5% as of 2Q12 as it deals with the downstream processing, compare to steel traders and suppliers. (Gross: 16.3% and net: 8.7%).

Warrants expiring in December. Yongnam’s share price has lagged the sector due to 3-for-10 warrants issued at SGD0.03 in 2007. It has an outstanding balance of 364.3m warrants which will expire on 14 Dec 2012, with a conversion price of SGD0.25. Full conversion of the warrants will result in a 29% dilution to EPS.

Good times do last. With a solid track record on infrastructural projects, Yongnam will continue to thrive in the resilient public sector. It now trades at FY11 PER of 4.6x and P/B of 1.0x compared with sector hist. P/E of 5.3x. Although it does not have a dividend policy, it has an average payout ratio of 16%