Yongnam Holdings

Kim Eng on 16 Apr 2013

Initiate BUY on a potential multi-bagger. We initiate coverage on Yongnam Holdings with a BUY rating and Street-high TP of SGD0.45, for 53% upside. With a leading and defensible position in Southeast Asia for structural steel and strutting assets, it is a multi-bagger in the making as it is poised to transform into an infrastructure powerhouse over the next five years, riding on an unprecedented boom in Asia.

Not your average contractor. Yongnam is perceived as a construction firm, which generally has low pricing power and cyclical earnings. But it has recorded profit growth for six consecutive years prior to FY12 and
its margins have consistently outshone its peers. This suggests that its business enjoys high barriers to entry. Unmatched technical expertise in its niche coupled with an unparalleled track record of iconic projects makes it the go-to company for most major international contractors.

Riding on Asia’s infrastructure boom. As a pioneer in the business, Yongnam has accumulated the largest reusable strutting assets in Southeast Asia with a replacement cost of SGD300m, putting it in pole position to win major projects such as the new MRT network in Kuala Lumpur. The company is well-poised for more regional work, having completed an impressive portfolio of works such as Hong Kong’s MTR.

Promises of the Golden Land. Yongnam recently announced that it has formed a consortium with Japan’s JGC and Singapore Changi Airport, bidding to build and own an international airport in Myanmar. Winning this project, which is due to be announced by the end of this year, may help establish a recurring income stream and open up further opportunities in the country.

Overhang removed, ready to dance. With the expiry of 365m warrants in Dec 2012, we believe a major share price overhang has been removed. Together with an earnings story (20% CAGR to FY15F), improvement in free-cash-flow yields (9% for FY13F to 19% in FY15F) and major contract win catalysts, we believe the stock is ready for a sharp re-rating. Our TP of SGD0.45 is pegged at 10x FY13F, which is
in line with its peers despite the company’s superior business model.