Valuation
· Tiong Woon is trading at a 18.7% discount to its book value of 49.2 S cents with a dividend yield of 1%.
Our View
· We highlighted to investors that Tiong Woon’s share price may have hit bottom 6 months ago.The counter has since gained 66.7% on improving business outlook. To recap, we shared with investors that margins are expected to improve in 1HFY13 from an increase in both utilisation rate and rental rates. With demand from numerous oil and gas projects rising in the region, rental rates will normalise to 85% and utilisation rate is also expected to improve from 66% in FY12 to 75% for FY13.
· Tiong Woon continues to see opportunities in emerging markets. According to management, Tiong Woon will focus in sectors such as oil and gas, petrochemical, power and construction in Myanmar,Vietnam and India. Tiong Woon remains committed toIndia despite the fact that they had to make some provisions of S$3.4m for impairment on trade receivables from a series of oil & gas customers in FY12.
· We reiterate that Tiong Woon is not a pure crane rental operator. Tiong Woon differentiates itself from other crane operators by providing a comprehensive project management service apart from bare crane rental. These service project contracts are longer term in nature (rates are locked in) and therefore, earnings theoretically are more resilient in nature. However, we cautioned that margins from these contracts are lower as Tiong Woon has to incorporate higher staff costs (project managers) and are unable to ride on rising rates on such longer-term contracts.
· We think the book could be undervalued by 15-20%. We observed that Tiong Woon is able to record strong gains from disposal of property, plant and equipment. For example, the group had disposed five large cranes in 2QFY13 and recorded close to S$1m of gains from S$4m of proceeds. Thus, based on a back-of-the-napkin calculation, these cranes are worth 10-20% more in the market than book value and thus conservatively the NAV of Tiong Woon is actually undervalued by that amount. That explains why some of their peers are trading above book.
Financials Highlights
· Tiong Woon reported a net profit of S$9.1m in 1HFY13 driven by a rise in revenues and margins from the Heavy Lift and Haulage and Trading segments. Revenue from Heavy Lift and Haulage grew 38% yoy to S$74.5m as the group took on larger heavy lift and installation projects in the Asia Pacific region. However, the Fabrication & Engineering business continued to be in the red with profit before tax of S$3.3m in 1HFY13 from higher subcontractor and equipment rental costs incurred during the quarter.
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