TIONG WOON

UOBKayhian on 25 Aug 2014

VALUATION

• Maintain BUY and target price of S$0.455, pegged to 0.8x FY14 P/B FINANCIAL RESULTS
• FY14 net profit rose 25% yoy to S$22.1m. During the year, Tiong Woon also completed the disposal of its discontinued operations (fabrication segment) and recorded a gain of S$3.2m.
•  Profit from continuing operations rose 2% yoy to S$18.7m (99% of our 2014 estimate) as gross margin expanded to 33.9% (2013: 29.5%) after the engineering operations were scaled down. Going forward, we expect margins to maintain at the current levels.

OUR VIEW

• Asset play at 0.6x P/B. As highlighted in our initiation report, the major selling point of Tiong Woon is the stock trading at a steep discount to its book value and undervalued property, plant and equipment (PPE) (which consists mainly of the crane fleet) held at cost in the balance sheet. Our channel checks confirm the hidden value of crane assets (due to the difference in book value and market value under the depreciation policy).
• Continued strong gains from undervalued PPE. Tiong Woon continues to record strong gains on disposal of its PPE in 2014. Based on the back-of-the-envelope calculation, we estimate Tiong Woon to record an 89% gain from the disposal of PPE. (2013: 50% gain on disposal of PPE)
• M&A activity on the rise in the industry. According to sources, Tat Hong, one of the largest crane rental companies in the world, has been engaging private equity firms for a possible privatisation offer. Affinity Equity Partners had earlier put together an offer for Tat Hong, that valued it at S$1.30/share (1.2x P/B), but did not proceed further. While we do not see Tiong Woon being privatised in the near term, a rise in M&A activity in the industry may shed light on Tiong Woon’s undervalued assets.
• Slow and steady 2015. While there have been some concerns over the delay in the awarding of contracts or tendering process in the oil and gas (O&G) sector, demand from the O&G sector is expected to remain resilient due to a rise in maintenance jobs. We estimate a 20% increase in demand for maintenance jobs from the O&G industry for 2015. Major infrastructure projects,  such as the airport and rail network, are also expected to support demand for heavy lift and haulage.
• With the gradual scale down in engineering operations, we cut our revenue forecasts by 18% and 20% for 2015 and 2016 respectively but maintain our profit forecasts as there had been minimal contribution from the engineering segment. Engineering contributed S$1,000 to pre-tax profit in FY14.