Monday, July 29, 2013

Yongnam : Diversifying Into Infrastructure Investments (UOBKH)

Yongnam Holdings
Share Price S$0.340
Target Price S$0.450
Diversifying Into Infrastructure Investments

Valuation/Recommendation
• Maintain BUY and target price of S$0.45, based on peers’ average PE of 9.7x on our 2014F EPS of 4.7 cents.

Investment Highlights
• Established track record. Yongnam has more than 40 years of experience in steel fabrication and provision of engineering solutions. The company has worked with numerous reputable contractors, such as Takenaka Corporation, Shimizu Corporationg Samsung Corporation and Ssangyong E&C. It was also involved in many major projects that changed the architectural landscape in Singapore.


• Diversifying into infrastructure investment Yongnam has joined a consortium comprising JGC Corporation and Changi Airport Planners and Engineers Pte Ltd to evaluate a project tender for the construction and management of Hanthawaddy International Airport in Myanmar. This is part of Yongnam’s diversification into infrastructural developments locally and overseas through joint ventures and strategic alliances. According to management, this is a 30-year BOT (build-operate-transfer) project where Yongnam will build and Changi Airport Planners will operate the airport.

• Strong pipeline of projects will keep Yongnam busy for a while. Regional economies have been investing aggressively in infrastructure projects, which bodes well for Yongnam. In Singapore, we have the Land Transport Authority’s various contracts for the Thomson MRT Line and the Kallang Paya Lebar Expressway (KPE)/ Tampines Expressway (TPE) interchange. In Malaysia, the country is planning to build the Kuala Lumpur-Singapore high-speed rail worth RM8b-14b. Management guided that within these two years, the company has a tenderbook of S$743m in the structural steelworks space and S$544.2m in the specialist civil engineering space.

Valuation
• Maintain BUY and target price of S$0.45, implying 32.4% upside from current price. We derived our target price using peers’ PE average of 9.7x on our 2014F EPS of 4.7 cents.

Investment Highlights
• Established track record. Yongnam has more than 40 years of experience in steel fabrication and provision of engineering solutions. The company has worked with numerous reputable contractors, such as Takenaka Corporation, Shimizu Corporation Samsung Corporation and Ssangyong E&C. It was also involved in many major projects that changed the architectural landscape in Singapore.

As Yongnam also has a presence in major cities, such as the Middle East, India, Hong Kong, we believe it is able to cherry pick projects that generate the most gross margin. This is particularly important in a highly competitive market like Singapore where gross profit margins are often razor thin.

• There has been growing interest in underground infrastructure in land-scarce Singapore. The Ministry of National Development (MND) has announced works on a master plan for underground space in Jan 12. With the two new Eastern Region Line (ERL) and Thomson Line (TSL) expected to be completely underground, we believe there will be an increase in underground infrastructure as the population grows.

We understand from market players that Yongnam used to have a 40-50% market share of the MRT projects within the specialised civil engineering space. However, as competition heightens among the foreign main-contractors that had tendered for these projects aggressively, Yongnam had to walk away from lower-margin works and focused its resources on overseas projects. We see a trend reversing as most main contractors are now facing massive cost pressures and thus for the upcoming Thomson Line tenders, these contractors are likely to build in a higher margin of safety.

• Diversifying into infrastructure investment. Yongnam has joined a consortium comprising JGC Corporation and Changi Airport Planners and Engineers Pte Ltd to evaluate a project tender for the construction and management of Hanthawaddy International Airport in Myanmar. This is part of Yongnam’s diversification into infrastructural developments locally and overseas through joint ventures and strategic alliances. According to management, this project will be under a 30-year BOT (build-operate-transfer) project where Yongnam will build and Changi Airport Planners will operate the airport.

We view the move positively as the construction industry in Singapore has been hit hard by rising labour costs and keen competition from foreign players. Yongnam currently derives 85% of its revenue from Singapore. With this diversification, Yongnam will be able to enjoy recurring income from infrastructure investments rather than lumpy project earnings recognition.

• Strong pipeline of projects will keep Yongnam busy for a while. Regional economies have been investing aggressively in infrastructure projects, which bodes well for Yongnam. In Singapore, we have the Land Transport Authority’s various contracts for the Thomson MRT Line and the Kallang Paya Lebar Expressway (KPE)/Tampines Expressway (TPE) interchange. In Malaysia, the country is planning to build the Kuala Lumpur-Singapore high-speed rail worth RM8b-14b. Management guided that within these two years, the company has a tenderbook of S$743m in the structural steelworks space and S$544.2m in the specialist civil engineering space.



Source/Extract/Excerpts/来源/转贴/摘录: UOBKH-Research,
Publish date:25/07/13

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