Monday, September 9, 2013

Yongnam : Healthy 17-year Work Pipeline (MKE)

Yongnam Holdings
Share price: SGD0.295
Target price: SGD0.40 (unchanged)
Healthy 17-year Work Pipeline

Eyes SGD670m worth of contracts in 2H13. We continue to like Yongnam as it is a prime beneficiary of Singapore’s infrastructure growth story, given its position as the strongest structural steel player locally with the largest strutting asset inventory. We believe it has hit the bottom of the cycle and is geared up and ready to replenish its orderbook. Yongnam is tendering for SGD670m of potential projects which would commence in 2H13. Reiterate BUY with a TP of SGD0.40. Transferring coverage of Yongnam Holdings to Alison Fok.

MRT ensures steady pipeline of contracts. Based on past records, the Land Transport Authority will spread out the awarding of MRT contracts in order to minimise land traffic disruption. This translates to a healthy work pipeline for at least 17 years until 2030. Sixteen Thomson Line civil contracts have been placed out, with three already awarded to the main contractors. We expect subcontracts will be given out in late 2013 or early 2014. As a rough gauge, Yongnam has won around SGD200m worth of contracts for Downtown Line (DTL) Stages 2 and 3. It is currently in talks with SK E&C, the new contractor for the DTL Stage 2 project, to resume work. We expect Yongnam could start work as early as next month.

Good long-term outlook. Yongnam continues to tender for projects overseas such as the Hong Kong MTR extension line and the KL Metro Line. We highlight M+S Pte, a 60:40 joint venture between Khazanah Nasion and Temasek Holdings has appointed Obayashi Corp for Duo project in Rochor, and Marina One to a consortium made up of Hyundai E&C and GS E&C last week. Yongnam has worked Obayashi previously for One Raffles Quay as well as Hyundai in various projects. We think
Yongnam stands a good chance of winning contracts from this.

Orderbook replenishment a key priority. We expect Yongnam’s share price to be driven by contract wins rather than earnings this year. Of its existing orderbook of SGD266m, 44% will be recognised by year-end. With several projects coming to fruition this year, namely, Marina Coastal Expressway, earnings growth would likely ease in 2H13 and 1H14 on slower orderbook replenishment. Gross margin, too, would stay flat on increased contributions from structural steel-works. But we remain positive on Yongnam’s contract wins going forward.

Catch-up opportunity to peers; reiterate BUY. Given that Yongnam is tendering for an overall SGD1.3b worth of contracts, we do not think the stock should be trading at 8.1x FY13F PER. Instead, it should trade closer to its closest peer, Malaysia-listed Eversendai, at 11x forward PER. We keep our TP unchanged at SGD0.40, pegged at 11x FY13F-15F earnings.

Thomson Line is coming
Three-stage development. The 30km-long Thomson Line will connect Woodlands to the Marina Bay area. To be constructed in three stages, it will comprise 22 stations and six interchange stations. The first stage will consist of three stations from Woodlands North to Woodlands South and will be completed in 2019. The second stretch will cover stations from Springleaf to Caldecott and will be completed in 2020. The final stage will stretch from Mount Pleasant to Gardens by the Bay and will be completed in 2021. The estimated budget for the Thomson Line is SGD21b compared to SGD20.2b for the Downtown Line.

Three out of 16 civil contracts awarded. So far, three civil contracts totalling SGD861.7m have been awarded. The rest will be announced progressively in 2H13, or around three contracts per month. We expect subcontracts will be given out closer to late 2013 or early 2014.

Yongnam in talks to resume work at DTL2. Since Austria-based Alpine Bau filed for bankruptcy, the Land Transport Authority (LTA) has appointed two new contractors, Australia-based McConnell Dowell and SK E&C (Singapore), to take over the projects at Sixth Avenue and King Albert Park and Tan Kah Kee station for SGD254m and SGD222m, respectively. Completion of Downtown Line Stage 2 (DTL2) will thus be delayed by six months from the original deadline in Dec 2015. According to LTA, the works on other contracts are progressing on schedule. Yongnam currently is in talks with SK E&C to resume work. If successful, it can expect to restart work as soon as next month.

Yongnam took home the largest total contract value for DTL 2&3. Although Kori has been a fierce competitor in the strutting business, we found that Yongnam was the largest player in terms of total contract value taken for DTL stages 2 and 3 – SGD214m vs Kori’s SGD140m. As a percentage of the main contractor’s total value, it accounts for 9.5% of the total contracts the main contractor is involved in.

Margins bottoming out. Aside from a bumper bonus from Gardens by the Bay, Marina Bay and Marina Coastal Expressway between 2010 and 2011, Yongnam’s average gross margin ranges from 20% to 25%. The recent softening in margins is due to the segmental mix being skewed towards structural steelworks as well as increasing competition. We expect gross margins to have bottomed out and to stay flat or show a slight improvement going forward depending on the contract wins.

SGD266m orderbook in need of replenishment. Yongnam’s current orderbook is split 43:57 between structural steelwork and specialist civil engineering. Of these, 44% is expected to be completed in 2H13. Although the company has bagged SGD62m worth of new jobs YTD, its orderbook as at end-2Q13 was at its lowest since 2008. Replenishment rate has slowed significantly since 2Q12 but we expect Yongnam to see a surge in contract wins again in 2H13 and possibly, 2014. Singapore’s
long-term infrastructure growth story will continue to have Yongnam as a direct beneficiary.

Minister’s blog post. In a recent blog entry, National Development Minister Khaw Boon Wan touched on the creation of underground transport hubs, pedestrian links, utility plants, storage and research facilities, industrial areas and other public spaces. He wrote that the ministry is “thinking about the possibility of developing an underground equivalent of the Master Plan”, which is expected to be posted in 2H13. If so, we believe Yongnam stands to benefit from future underground infrastructure works.

Source/Extract/Excerpts/来源/转贴/摘录: MKE-Research,
Publish date: 09/09/13

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