LIAN BENG

UOBKayhian on 23 Jan 2015

VALUATION

• Lian Beng is trading at 3.7x FY14 PE, offering a FY14 dividend yield of 3.7%.

 RESULTS

• Lian Beng’s 1HFY15 net profit doubled to S$35.5m on the back of increased contributions from associates and JVs. Share of results of associates and JVs surged to S$21.4m (1HFY14: loss of S$0.9m) due to the disposal of a 19% stake in a proposed hotel development at 122 Middle Road, and the recognition of developer profits from projects such as Newest, KAP Residences and The Midtown. 
• Its construction orderbook remains strong at S$821m as at 30 Nov 14, and shows good earnings visibility until FY17.

INVESTMENT HIGHLIGHTS

• As a BCA A1-graded contractor with a 40-year operational track record, Lian Beng prevails as an established local contractor, having served a wide range of clients, including the HDB, Ministry of Defence and Marina Bay Sands.
• Savvy business management. As competition intensified in the local construction scene, Lian Beng was quick to react as it diversified into complementary businesses such as the supply of ready mixed concrete (RMC) and its most recent venture into asphalt premix (used for roads) to control costs.
• Diversified business units...Lian Beng currently has four main business segments:a) construction, b) property development, c) construction-related businesses (engineering and leasing of construction machinery, supply of RMC and asphalt) and d) the leasing of a workers’ dormitory. Excluding FV gains and profits from property developments, we estimate profit from construction and related businesses as well as rental income from its workers’ dormitory should account for about 71%, 22% and 7% of FY14’s profit respectively.
• … with value waiting to be unlocked. For FY14, profit from construction-related business contributed to S$9.2m of Lian Beng’s FY14 pre-tax profit. This number is expected to grow as the new asphalt plant, in which Lian Beng holds a 40% stake, is set to come on stream by early-15 and start contributing to net profit in FY16. As highlighted in our previous report, we do not dismiss the prospect of a possible spinoff of this segment in the future as the profit grows. To recall, in 2011, Lian Beng had proposed to spin-off and list its construction-related businesses on the Taiwan Stock Exchange. The plan was abandoned in 2012 due to unfavourable market conditions and new policies imposed by the relevant authorities in Taiwan.
• Our view. Lian Beng’s share price has seen a correction of about 20% from its 52- week high. From Oct 14-Dec 14, Lian Beng repurchased 19.6m shares (about 3.7% of total outstanding shares) through their share buyback programme with prices ranging from S$0.60-0.68/share. With a diversified earnings base, dividend yield of 3% and price support coming from its daily share buybacks, we think Lian Beng is worth a look at current levels.

Lian Beng

OCBC on 15 Apr 2014

3QFY14 PATMI came in at S$33.6m – up 178% YoY – mostly due to a boost from the TOP of M-space, a 55%-owned industrial development. This is within expectations, and 9MFY14 PATMI now makes up 78% of our FY14 forecast. Management announced plans to grow its recurring income base to ~S$20m p.a. (est. 31% of FY15F PATMI) through its ready-mix concrete, asphalt and dormitory businesses. Already we have seen the ready-mix concrete business contribute S$5.8m last year and also expect its new asphalt pre-mix plant, in which it has a 40% stake, to be operational by end 2014. We value Lian Beng using a sum of the parts (SOTP) methodology in line with peers: 1) for its construction/materials-related segment, we apply a 5x PE to FY14/15F blended earnings and, 2) for its real estate development segment, we apply a 30% RNAV discount. Downgrade to HOLD, on valuation grounds, with a higher value estimate of S$0.65 (versus S$0.58 previously).

M-Space boost within expectations
3QFY14 PATMI came in at S$33.6m – up 178% YoY – mostly due to a boost from the TOP of M-space, a 55%-owned industrial development. This is within expectations, and 9MFY14 PATMI now makes up 78% of our FY14 forecast. Topline for the quarter is S$257.5m, up 122% similarly from M-Space’s impact. The construction order book currently stands at a healthy S$1.1b as at end Feb-14. Looking ahead to FY15, we expect contributions from key development projects, Spottiswoode Suites and Midtown Residences, to flow in as progress recognition begins.

Target: S$20m recurring income per annum
Management targets to grow its recurring income base to ~S$20m p.a. (est. 31% of FY15F PATMI) through its ready-mix concrete, asphalt and dormitory businesses. Already we have seen the ready-mix concrete business contribute S$5.8m last year and also expect its new asphalt pre-mix plant, in which it has a 40% stake, to be operational by end 2014. In addition, its 55%-owned Mandai dormitory is anticipated to contribute ~S$7m in earnings every year. We believe this strategic direction is sound, given growing uncertainties in the private construction space as we enter a housing downturn.

Fairly valued here; downgrade to HOLD
After updating for latest datapoints and acquisitions, our FV estimate increases to S$0.65 from S$0.58 previously. We value Lian Beng using a sum of the parts (SOTP) methodology in line with peers: 1) for its construction/materials-related segment, we apply a 5x PE to FY14/15F blended earnings and, 2) for its real estate development segment, we apply a 30% RNAV discount. Note that, just two months ago, we had reiterated Lian Beng (at S$0.52) as a buy in our special situation piece “Anticipating Earnings Spikes” but now see the shares to be fairly valued after appreciating 28% after. That said, its price volatility has spiked over the last weeks; while its share price could run ahead of fundamentals in the near-term, we would refrain from adding exposure here. Downgrade to HOLD.

Lian Beng

OCBC on 11 Oct 2013

Lian Beng announced 1QFY14 PATMI of S$7.3m – down 30.9% YoY – mostly due to increased selling and marketing expenses incurred at development projects and the cessation of tenant leases at Hougang Plaza. Topline for 1QFY14 came in 44.2% higher YoY at S$163.5m; due to a shift in revenue mix with a heavier percentage contribution from the construction segment, overall gross margins continue to dip – falling from 14.1% in 1QFY13 to 12.2% in 1QFY14. We note that Lian Beng continues to enjoy a firm construction book of S$1.2b, which would buttress forward revenues to an extent, and also a strong balance sheet with S$200.7m in cash with a fairly benign net gearing of 25.2%. That said, we see increasing uncertainties in the domestic residential space from recent cooling measures which could result in headwinds for the group’s property development business going forward. Rated BUY with a fair value estimate of S$0.58.

1QFY14 profit down 31% YoY
Lian Beng announced 1QFY14 (ended 31 Aug 2013) PATMI of S$7.3m – down 30.9% YoY – mostly due to increased selling and marketing expenses incurred at launched projects (Spottiswoode Suites, The Midtown, Newest, KAP Residences and Eco-tech@Sunview) and the cessation of tenant leases at Hougang Plaza which was demolished for redevelopment. We also note the relatively new dormitory business contributed an estimated S$1.3m - S$1.4m in attributable net profit over the quarter. 

Falling gross margins from shifting revenue mix
Topline for 1QFY14 came in 44.2% higher YoY at S$163.5m due to higher contributions from the construction and property development businesses as well as the ready-mixed concrete division. Due to a shift in revenue mix with a heavier percentage contribution from the construction segment, however, overall gross margins continue to dip – falling from 14.1% in 1QFY13 to 12.2% in 1QFY14.

Expect profit recognition from M-space in 2Q-3QFY14
Looking forward to 2Q-3QFY14, we expect profit contributions from the fully sold 55%-owned industrial development, M-space, which can only be recognized upon TOP as stipulated by the accounting standard INT FRS 115. We note that already launched development projects from the group are achieving fairly firm sell-through rates and that the construction order book remains strong at S$1.2b as at end Aug 2013 – only marginally down from S$1.3b as at end May 2013.

BUY with a FV estimate of S$0.58
Besides the firm construction book, which would buttress forward revenues to an extent, Lian Beng also possesses a strong balance sheet with S$200.7m in cash with a fairly benign net gearing of 25.2%. That said, we see increasing uncertainties in the domestic residential space from recent cooling measures which could result in headwinds for the group’s property development business going forward. BUY with a fair value estimate of S$0.58.

Lian Beng Group

Maybank Kim Eng Research, June 11

WE caught up with Lian Beng's management for updates on ongoing construction and property launches, and are now convinced that FY2014 ending May 31 will be a record-breaking year with earnings surpassing its 2012 peak of $51.4 million.

We are also positive that Lian Beng will be able to maintain its dividend payout of two cents a share payable in the next quarter.

We have revised our FY2014 and FY2015 estimates by 8-11 per cent, and applied a higher multiple on its construction earnings. Upgrade to "buy" with a revised target price of 68 cents, indicating upside of 30.8 per cent.

The recent Poh Lian construction problems offered Lian Beng the opportunity to take over the Goodwood Residence construction contract, which is scheduled for completion in October 2013.

Lian Beng's orderbook currently stands at $1.2 billion including Dakota Crescent and Laurels, which if completed on schedule by end- 2013, will free up manpower for further construction jobs.

Since the start of 2013, Lian Beng has secured seven private-sector contracts valued at $739 million.

King Albert Park, Hong Leong Gardens, and Hougang Plaza were launched year to date. Hougang Plaza, now The Midtown and The Midtown Residences, has achieved an average 62 per cent take-up rate.

We expect Lian Beng to begin construction at end-2013, resulting in increased contribution in the second half of FY2014. Seletar Green is expected to be launched the next quarter.

At current levels, Lian Beng is trading at 3.1 times FY2014 PE estimate, versus peers at between five and seven times PE. We peg Lian Beng construction earnings at six times, on a par with its construction peers.

We like Lian Beng for a strong orderbook of $1.2 billion comprising of higher-margin private-sector projects, its latest property launches' with strong sell-through rates and also a healthy buildup in recurrent income. We upgrade to "buy" from "hold".

BUY

Lian Beng Group

Kim Eng on 12 Apr 2013

Change in valuation matrix, maintain HOLD. 3QFYMay13 results came in in-line with expectations, 9MFYMay13 revenue and net profit are up 5.1% and down 24.2% YoY to 350.7m and 30.7m respectively, due to a lack of property earnings recognition this year. As we roll over our earnings forecast to FYMay14, we have changed our valuation matrix from P/E to SOTP valuation to account for its diversified
businesses. We maintain HOLD with a higher TP of SGD0.49. We believe the market has already factored in earnings coming from its property development projects.

Four contracts secured year to date. Year to date, Lian Beng has secured a total of four contracts – two residential projects of Skies Miltonia and Bartley Ridge and two construction and engineering contracts for Oxley’s industrial project which add up to SGD538m of contract wins, exceeding our previous estimate of SGD300m for FYMay13. This brings Lian Beng’s orderbook up to SGD986m. We are estimating SGD400m in contract wins in FYMay14, sustaining its orderbook at current levels.

Midtown @ Hougang to begin preview. With the recent cooling measures targeting individual retail units, we believe that Lian Beng will not be as affected as they have submitted plans prior to the measures being announced. The Midtown @ Hougang (ex. Hougang Plaza) will begin preview this month. In addition, Lian Beng has joined with KSH and Kim Seng to purchase a commercial plot in 160 Changi Road, and intends to redevelop the site. Assuming a 60/40 split - we estimate the commercial and retail ASP to be at SGD2,000 and SGD2,500psf respectively, and be accretive by 1.3cts to its value per share.

Look out for FYMay14. Lian Beng will be completing its construction of M-Space @ Mandai in September 2013, while the 1st phase of its workers dormitory will be completed and launched in June 2013. So far, the workers dormitory has achieved a 50% commitment rate, and we expect this to ramp up to over 95% within 6 months of launch due to the overwhelming demand and lack of supply for workers dormitories.

Lian Beng Group

Kim Eng on 15 Jan 2013

Below expectations. 1HFYMay13 results came in below market expectations. Construction orderbook remains lukewarm at SGD547m, down 29.1% from last year’s strong orderbook of SGD772m. Although the stock is fundamentally sound, we believe recent property cooling measures and increased costs incurred from its property stakes could impact Lian Beng’s earnings and its ability to pay dividends. Downgrade to HOLD with a target price at SGD0.45, pegged to 6x FYMay13F P/E.

Dampened margins. 1HFYMay13 reported sales and net profit of SGD234.9m (-1.2% YoY) and SGD19.8m (-35.1%YoY) respectively. Gross margin fell by 2.2ppts due to lower margin construction  contracts recognised as well as lowered recognition from the property segment. Higher operating expenses were also incurred for preparation to launch Spottiswoode Suites.

Zero contracts recorded for 2Q. Current orderbook stands at SGD547m, 29.1% down from last year’s strong orderbook of SGD772m. So far this quarter; no contracts have been awarded to Lian Beng. We expect Lian Beng to be focusing on their 50% owned Spottiswoode Suites and Hougang Plaza next year onwards, which would mean the group will rely more heavily on property earnings.

But Spottiswoode Suites soft-launch favourable. Lian Beng together with JV partner, Centurion, has soft-launched Spottiswoode Suites, and received an approximate take-up of slightly over 50%. Over 100 units are estimated to have achieved ASP of SGD2,200psf, with a 3-4% premium to Spottiswoode 18 and Spottiswoode Residences launch prices. If fully sold, we are estimating SGD36.9m pre-tax profit for the
group’s 50% stake, to be recognised over FY14-17E.

Downgrade to HOLD. Lian Beng is trading at 5.3x FYMay13 P/E, whereas its peers are trading at a forward P/E of 5.7x. We have slashed our earnings forecast as we adjust our profit recognition in the property development side and cut dividend by 1 ct in view of higher capital needed to fund property development.

Lian Beng Group

DMG & PARTNERS RESEARCH on 15 Oct 2012

LIAN Beng Group's (LBG) Q1 FY2013 earnings were 44.5 per cent lower y-o-y at $10.5 million, as revenue dipped 16.5 per cent y-o-y to $113.4 million. The earnings decline was due to the absence of a one-off gain in Q1 FY2012 of $7.9 million and higher operating expenses.

The lower revenue was mainly due to lower revenue from property development. While LBG has fully sold its 55 per cent-owned industrial development, it can recognise only the relevant revenue upon the project obtaining temporary occupation permit (TOP), which is expected in end-FY2013.

Outlook is expected to be healthy, backed by the government's plans for infrastructure building and its pipeline of residential project developments.

LBG has obtained approvals to develop a third workers' dormitory block in its remaining vacant plot in Mandai, which would add 1,540 beds to its existing 4,750 beds. The dormitory block is scheduled to TOP by Q4 FY2013. This parcel of land is part of the plot that will also house its industrial property, M-Space @ Mandai.

Despite the recent measures surrounding the residential property segment, LBG plans to launch its 50 per cent-owned Spottiswoode Suites and 50 per cent-owned Hougang Plaza in FY2013. Its development projects are all JVs with other builders. This would help lower any potential risks it may face in the property-development segment.

Valuation is attractive as LBG is currently trading at 4.1x FY2013F earnings. Maintain "buy", with a TP of 59 cents, based on 6x FY2013F P/E.

BUY

Lian Beng Group

Kim Eng on 12 Oct 2012

Revenue down on lack of one-off gain. Lian Beng reported a 16.5% YoY drop in revenue to SGD113.4m for 1QFY5/13. Stripping out the SGD7.9m one-off gain from the sale of an investment property in 1QFY5/12, bottomline contracted by 7.4% YoY to SGD10.6m. The lower- than-expected results could also be attributed to lower sales recognition from the property development division. We maintain our BUY call in view of Lian Beng’s healthy construction orderbook and burgeoning recurring income.

Margins shrank on lower property sales recognition. Lian Beng’s gross and net margins fell by, respectively, 1.1ppt YoY and 4.9ppt YoY, following lower sales recognition of property development projects. The proceeds from its industrial project, M-Space, are expected to be fully recognised in 1HFY5/14F. Separately, Spottiswoode Suites, previously Dragon Mansion, is slated for launch by year-end. Based on estimated breakeven price of SGD1,575 psf, we expect the project’s ASP to be SGD2,000 psf. The 50%-owned Hougang Plaza will also be ready by year-end. We believe these two projects will contribute substantially to FY5/14F earnings.

In net debt position. From net cash position, Lian Beng’s total borrowing has risen by SGD96.6m QoQ to SGD197.2m on the back of higher financing costs for the development of Spottiswoode Suites and Hougang Plaza, as well as increased working capital for its other residential stakes and reclassification of the development cost for its remaining vacant plot in Mandai Estate. The group’s net gearing now stands at 0.05x.

But strong cash-churning machines will provide support. Lian Beng’s construction business and recurring income from precast concrete products are expected to help shore up the group’s dividend payout of SG2cts for FY5/12, which translates to a yield of 5.1%. Its construction orderbook currently stands at SGD650m.

Reiterate BUY. We reiterate our BUY call, but lower our target price to SGD0.54, due to higher cash flow needed which may affect timing of dividend. The stock currently trades at 4.1x FY5/12 historical PER vis-à- vis the sector average of 5.5x.

Lian Beng Group

Kim Eng on 25 Sept 2012

In a sweet spot. Prospects for the construction sector in Singapore remain positive. Despite a cut in a construction forecast, the segment continues to outperform overall GDP growth estimates. Lian Beng will begin its property launches as scheduled with Hong Leong Gardens in October, and Dragon Mansion and Hougang Plaza following that. Its strong position as a contractor and successful venture into property development makes it our top pick in the construction sector. Reiterate BUY.

Launches to start in October. Lian Beng has received the outline planning provision for its respective stakes in property development, and we expect the launch of Hong Leong Gardens to take place in October. The group holds a 10% stake in Hong Leong Gardens with Oxley Holdings leading the consortium. It is zoned for mixed use, and we expect selling prices for residential and retail space at SGD1,500psf and SGD3,000psf respectively.

Divestment of stake in Emerald Hill. Lian Beng has fully divested its 10% stake in 111 Emerald Hill for SGD16.9m. We did not account for this project in our forecasts, as earnings from the project are fully dependent on units sold after its TOP in August, thus there is no impact on our FYMay12 estimates. Lian Beng’s remaining active project, Lincoln Suites, has an 81% take-up rate and is expected to TOP in late 2014.

Secured contracts. Construction remains the core business, accounting for 75% of sales. Lian Beng has secured a 50% stake in a contract worth SGD169m for 361 units in Thomson Grand with Paul Y C&E. Works started in August and this job has boosted its construction order book to SGD736.4m, which will be recognised through to 2015.

Steamrolling ahead. We like Lian Beng for its superior construction order book with an even mix of public and private projects, as well as a slew of properties slated for launch over the next few months. Maintain BUY with a target price of SGD0.63 pegged at 6x FYMay13 PER, backed by an attractive dividend yield of 5.1%.

Lian Beng Group

Kim Eng on 21 Aug 2012

A clear leader in the construction sector. Lian Beng Group’s (LBG) share price, along with rest of the sector, has underperformed vis-à-vis the STI. We believe that its current valuation, at ex-cash FY13 PER 1.9x, is unjustified. The Group has defied all odds to achieve a strong net profit of close to SGD50m. It currently holds a strong outstanding construction orderbook of SGD652m as of FY12. We are also impressed with the group’s active lookout for opportunities to boost its recurrent income. Maintain BUY with TP of SGD0.63.

Work dormitory beds increase by 32%. The group has obtained a provision permit from URA to develop a third workers’ dormitory block in its remaining vacant plot in Mandai. This will add 1,540 beds to its existing 4,750 beds. We are expecting this addition to contribute SGD5m to its bottomline. The dormitory block is scheduled to TOP by 4Q13. The group’s last plot in Mandai, which was used to build M-Space @ Mandai, is 100% sold out, and will be recognised upon completion in 1H13.

Teaming up with Oxley. Lian Beng has been astute in leveraging on Oxley’ Holding’s expertise to build and sell shoe-box cum retail units. The market’s appetite for small units took many by surprise: this could set the trend going forward in tandem with the changing social dynamics. The group has purchased 10–50% stakes in five projects, King Albert Park, Dragon Mansion, Seletar Garden, Hougang Plaza, and Hong Leong Gardens Shopping Centre. All these projects are JVs with Oxley and other builders. This also helps Lian Beng to secure better visibility in its construction orderbook.

Balance sheet shows flexibility. LBG holds a cash war chest of SGD86.1m (42% of market cap), which is just waiting to be unleashed. It is highly capable of either utilising its cash reserves, or taking on debt for acquisitions or JV opportunities. We estimate its free cash flow to stay strong averaging SGD43m per year till 2015.

Building on its core strength. We reiterate our BUY call on Lian Beng with a target price of SGD0.63, pegged at 6x FY13 PER. We anticipate steady growth ahead for the Group. Moreover, it has strong ROE and offers an attractive and sustainable dividend yield of 5.1%.

Lian Beng Group

OCBC on 27 Jul 2012

Lian Beng Group (LBG) reported that its 4QFY12 revenue fell 13% YoY to S$111.4m while PATMI remained flat at S$11.5m. LBG’s operating margin climbed an impressive 3.6ppt to 14%, but the impact of one-off items resulted in no growth in its PATMI. Management also recommended final and special dividends totalling S$0.02/share. In full-year comparison, LBG’s revenue in FY12 fell 12% to S$445.0m but PATMI rose 8% to S$52.1m. Revenue growth in ready-mixed concrete was particularly strong, jumping 83% in FY2012. LBG’s order book contracted to S$652m at end-FY12. However, the order book is still robust since it is twice the size of its construction revenue in FY12. We maintain our fair value estimate of S$0.47/share and BUY rating on LBG.

Reasonably strong financial performance in 4QFY12
Lian Beng Group (LBG) reported that its 4QFY12 revenue fell 13% YoY to S$111.4m while PATMI remained flat at S$11.5m. LBG’s operating margin climbed an impressive 3.6ppt to 14%, helping its operating profit to grow 18% YoY to S$15.5m. However, the combination of one-off gains in 4QFY11 and one-off losses in 4QFY12 caused LBG’s PATMI to stay flat. Management shared that the higher profit margins were achieved as a result of better project management. In addition, management recommended dividends totalling S$0.02/share, made up of a final dividend and a special dividend of each S$0.01/share.

Strong growth in ready-mixed concrete
In full-year comparison, LBG’s revenue in FY12 fell 12% to S$445.0m but PATMI rose 8% to S$52.1m. LBG’s construction segment remains its biggest revenue contributor, making up 75% of total revenue. Meanwhile, its ready-mixed concrete and property development segments contributed 17% and 7% to total revenue respectively. Revenue growth in ready-mixed concrete was particularly strong, jumping 83% in FY2012. The strong growth was due to LBG’s capacity expansion and strong demand from the construction sector.

Management stays cautiously optimistic
LBG’s order book contracted to S$652m at end-FY12, from S$742m at end-3QFY12. However, the order book is still robust since it is twice the size of its construction revenue in FY12. Management remains cautiously optimistic of the outlook for Singapore’s construction industry over the next 12 months and said LBG will remain active in tendering for new projects. Management added that construction demand is expected to remain strong, especially from public housing developments, institutional buildings and civil engineering projects.

Maintain BUY
We lower our revenue forecast of LBG in FY13F by 2% but increase our PATMI forecast by 1% to account for slower revenue growth but higher profit margins. Thus, we maintain our fair value estimate of S$0.47/share and BUY rating on LBG.

Lian Beng Group

OCBC on 12 Apr 2012

Lian Beng Group (LBG) reported that both its revenue and PATMI in 3QFY12 fell 27% YoY to S$96.0m and S$10.4m respectively. Despite its operating profit margin improving by 2ppt to 12%, LBG’s 3QFY12 PATMI fell in tandem with revenue due to lower one-off gains. The street, including ourselves, had previously not expected LBG’s execution of construction projects to slow. Consequently, we lowered our estimates of LBG’s FY12 revenue and PATMI by 16% and 10%. Though management remains cautiously optimistic of order flow in both public and private projects over the next 12 months, we reduce our fair value estimate of LBG to S$0.47/share, from S$0.51/share previously, but maintain our BUY rating.

Construction segment slows
Lian Beng Group (LBG) reported that both its revenue and PATMI in 3QFY12 fell 27% YoY to S$96.0m and S$10.4m respectively. Despite its operating profit margin improving by 2ppt to 12%, LBG’s 3QFY12 PATMI fell in tandem with revenue due to one-off gains falling to S$0.4m, compared to S$3.2m in 3QFY11. LBG’s construction segment remained its biggest revenue contributor even though its execution of construction projects slowed, causing a decline in the group’s revenue. At end-3QFY12, LBG’s order book slipped to S$742m, from S$772m at end-2QFY12.

FY12 estimates lowered
In 9MFY12, LBG’s revenue and PATMI totalled S$333.7m and S$40.6m respectively, meeting 62% and 76% of consensus full-year estimate. However, LBG’s 9MFY12 PATMI was boosted by an exceptional gain of S$7.9m from the sale of its investment property at New Industrial Road in 1QFY12. The street, including ourselves, had previously not expected LBG’s execution of construction projects to slow. Consequently, we lowered our estimates of LBG’s FY12 revenue and PATMI by 16% and 10% respectively to S$457.3m and S$53.1m.

Management stays cautiously optimistic
Management remains cautiously optimistic of the outlook for Singapore’s construction industry over the next 12 months and LBG will remain active in tendering for new projects. Management said continued interest in the mass market segment should sustain construction demand for the private housing market. On the other hand, construction demand for public housing projects, institutional buildings and civil engineering projects remain strong. Furthermore, LBG plans to list its ready-mixed concrete and engineering businesses in Taiwan so as to unlock shareholders' value.

Maintain BUY with lower fair value estimate of S$0.47
Despite lowering our revenue and PATMI estimates, we maintain our BUY rating on LBG but reduce its fair value estimate to S$0.47/share, from S$0.51/share previously, by pegging its EPS over the next four quarters to a P/E multiple of 5x.

Construction Sector

DMG & PARTNERS SECURITIES on March 2012

IS the productivity drive a bane to the construction sector? The government has been reiterating its call for companies to boost productivity and be more innovative to attract locals to enter industries that were previously viewed as not Singaporeans' 'first choice' when it comes to their job search.

The construction sector is caught in the above struggle to woo locals to join the sector, as well as to increase productivity.

Construction companies could face rising labour and administrative/marketing costs in its bid to attract locals into the industry, as well as the need to provide for higher expenditure on the purchase of machinery or equipment in order to automate labour- intensive tasks.

An example of how companies in the sector can attract new blood is the offering of scholarships of tertiary education to students studying construction-related courses and tailored career management programmes to the scholarships' recipients when they join those companies.

All these would come at an additional cost to companies. While these measures might push up costs of construction, any increases are likely to be reflected in increases in tender prices when companies tender for their projects.

In addition, to offset the increase in costs, companies may utilise the various productivity schemes in place to automate certain tasks and reduce manpower via the purchase of equipment/machinery.

With the various infrastructure and construction projects coming up such as the North-South Expressway, we maintain our 'overweight' recommendation on the sector. Our top picks within the sector are Lian Beng Group (buy, target price $0.71) and OKP Holdings (buy, target price $0.80).
OVERWEIGHT

Lian Beng Group

Kim Eng on 14 Mar 2012

Catalyst from Taiwan. We estimate that the spin-off and listing of Lian Beng’s subsidiaries in Taiwan could propel its valuation from $0.62 to $0.71. To recap, Lian Beng has proposed to spin off two subsidiaries (one in the engineering and leasing of construction machinery business, the other in the concrete manufacturing business) and list them on the Taiwan Stock Exchange. The proposal received shareholder approval this month. We expect Lian Beng to raise about $29m from the expected sale of 30% stake in the subsidiaries, based on a PER valuation of 11.5x and FY12 forecast earnings of $9.3m. If all goes well, we expect the listing to take place by end-2Q12.

More cash than ever, now at $185m. We expect Lian Beng to return some capital to shareholders in the form of a special dividend, which it can well afford. An additional one cent per share of special dividend works out to just $5.3m cash and will translate to an incremental yield of 2.6% on top of the existing forecast yield of 4.6%. We believe a special dividend of up to 1.6 cents per share is possible, based on its $185m cash less its committed capital for property developments, for a total dividend of 3.4 cents per share, or 8.7% yield.

Property developments at reasonable levels. Lian Beng has taken stakes in four property projects in the past 12 months. The latest was a 10% stake in the joint venture led by Oxley Holdings for the $96.2m acquisition of a freehold mixed development in Seletar Garden, the first successful collective sale this year. The total attributable development cost for the four projects is $176.4m, which is well supported by its war chest of $185m cash.

Get it before all the action begins. Buy now and be rewarded by the imminent Taiwan listing of Lian Beng’s subsidiaries and potential special dividends of up to 1.6 cents per share. This is in addition to the stock’s attractive ex-net cash FY12 PER of 1.7x, and a dividend yield that is already nearly 5.0%.