TIONG WOON

UOBKayhian on 10 June 2014

Undervalued service provider to the O&G industry
We initiate coverage on Tiong Woon with a BUY recommendation and a target price of S$0.455 pegged to its industry peers’ P/B average of 0.83x. Serving primarily the Oil & Gas (O&G) industry, Tiong Woon is an integral crane operator for oil majors in an industry that has high barriers to entry due to safety concerns. At 0.64x P/B, Tiong Woon is trading at a 23% discount to its local peers average P/B of 0.83x, offering value investors a huge margin of safety. The ability to consistently record strong gains from disposal of equipment suggests a possible understatement in fair value of assets, making valuation even more compelling.

INVESTMENT HIGHLIGHTS

• An integrated one-stop service provider. Tiong Woon is the 15th largest crane owner in the world. Providing a comprehensive set of project management services, from the planning and design of an integrated lifting and haulage service to the installation of dangerous Oil and Gas (O&G) structures (eg oil rigs), Tiong Woon plays an integral role in supporting its customers in the O&G industry.
• Serving a defensive niche. Deriving 70-80% of its revenue from the O&G industry, Tiong Woon’s earnings are relatively more resilient in nature as these service contracts are longer term in nature and can be recurring. Safety issues pertaining to the O&G industry also create high barriers to entry to the industry.
• Deep discount to book value offers high margin of safety. Tiong Woon is trading at 0.64x P/B, which is at a 23% discount to its local peers’ average P/B of 0.83x. The depressed valuation offers investors a high margin of safety.
• Possibly undervalued assets make valuation even more compelling. While the resale value depends on current market conditions, Tiong Woon has typically been able to resell its equipment above book value. In the last five FYs, we noted that Tiong Woon was able to record strong gains from the disposal of property, plant and equipment (PPE) of about 29-274% in excess of its book value, suggesting the possible understatement in fair value of PPE in its balance sheet.
• Possible stock re-rating on the cards. Affected by poor market sentiments as some of the industry peers’ earnings disappoint, Tiong Woon’s share price has remained depressed since last year despite a strong earnings rebound in FY13.However, we note the recent price strengthening in its locally listed peers of between 16.7%-40.7%, suggesting a possible re-rating could be on the cards, as Tiong Woon plays catch up to its peers.
• HQ redevelopment to bring cost savings and new recurring income source. Tiong Woon is in the midst of redeveloping its HQ to add 1ha of parking space, a 500-bed workers’ dormitory and about 320,000sf of warehouse space. We expect Tiong Woon to enjoy cost savings and a new recurring income source with the leasing of the dormitory and the warehouse space. The redevelopment is however expected to be only completed by end-15 (ie 2HFY16 onwards).