Yongnam

Kim Eng on 11 Apr 2013

Specialist construction firm with high barriers to entry. Yongnam is involved in two businesses; structural steelworks and civil engineering where we believe both have high barriers to entry. In these niche areas, Yongnam is a dominant player locally and a leading firm within the region. For example, it has one of the biggest set of reusable strutting assets in Asia outside of Japan. It also has an enviable track record in iconic projects such as Marina Bay Sands and ION Orchard.

Demand for structural steelworks set to rise. In the building industry, structural steel is a more costly substitute for reinforced concrete, with the advantage of faster turnaround and suitability for larger and complex projects. With a doubling of the MRT network expected by 2030, demand is set to rise from transport infrastructure both below and above ground. Management is also seeking opportunities within the offshore sector which may drive growth.

Regional infrastructure play. Yongnam has substantial experience in regional projects, such as airport projects in Bangkok and India, and rail projects in Hong Kong, Malaysia and Dubai. Given its impressive track record, we anticipate more future opportunities for Yongnam in the region, where infrastructure projects are currently booming and more iconic projects may be on the drawing boards.

A natural takeover target in our view. As a result of its strong net margins (14% in FY12) and healthy working capital cycle, Yongnam has consistently generated strong cash flows. Together with its niche capabilities built up over many years, we think large foreign construction firms may see the company as a takeover target. We note that shareholding are very fragmented, with founder/ management owning less than 20% of the company, putting it in a vulnerable position.

Appears undervalued. Based on consensus estimates, Yongnam is currently trading at 6.4X FY13F PER and 1.1X P/B, against peers which are trading at 9x PER and 1.1x P/B. Given its strong cash flows and attractive market position, we believe the company is undervalued, especially in the context of a takeover bid.