Yongnam Holdings Ltd - MANAGEMENT REPLY: Can it replenish the order book in time – which of the brokers is right?
By Ashish Saxena | Investor Central –
20/8/2013 – Yongnam Holdings Ltd's second quarter performance was hit by the bankruptcy of MRT Downtown Line's main contractor, Alpine Bau GmbH.
The company was also betting big on the two airport projects it had bid for in Myanmar.
But it didn't win either of the deals.
Myanmar's Department of Civil Aviation awarded the deal for Hanthawaddy International Airport, about 50 miles from Yangon, to a consortium led by South Korea's government-run Incheon International Airport Corp.
The Yangon International Airport deal went to a consortium led by Pioneer Aerodrome Services, according to an Eleven Media Group report.
In an announcement over the weekend, Yongnam said its consortium has been named as the back-up tenderers for both the airports.
But that doesn't give much hope to Yongnam's shareholders as Incheon International Airport Corp has already accepted the award of tender for Hanthawaddy International Airport.
And seems unlikely that Pioneer Aerodrome Services would give away the Yangon International Airport deal after winning it.
Last week, in its earnings report, Yongnam Holdings said it is actively pursuing S$1.3 bln worth of projects, of which S$670 mln are expected to commence in the remaining two quarters of the year – if it wins them.
Now that it has lost the tenders for the airports, one wonders how much of the above estimate it can achieve realistically.
The company announced the following earnings for Q2 FY13:
Revenue: +47.5% to S$115.1 mln
Profit: -28.6% to S$8.6 mln
One-off gains/(loss): (S$5.1 mln) vs Nil
Cash flow from operations: (S$6.4 mln) vs S$12.4 mln
Order book: S$266 mln as at June 30
The company secured S$57 mln worth of contracts in the second quarter.
Bullish analyst report
Bullish analyst report
Analyst James Koh at Maybank Kim Eng finds Q2 results to be mostly within expectations.
Revenue rose due to higher recognition from on-going projects.
Gross margins dropped because of a higher percentage of structural steel works, which is a low-margin business.
Kim Eng expects margins to improve from better-priced new contracts in future, and more revenue from strutting.
The broker says the management is renegotiating pricing of several major contracts.
New orders are expected to contribute about S$60 mln revenue in 2013.
Kim Eng says management feels they are the front-runners for two airport projects currently under discussion in Myanmar.
The broker feels the S$5.1 mln provision against Alpine Bau GmbH is likely to be written-back later on.
The broker has trimmed its FY13-FY15 earnings estimates by 2%-3% on assumption of lower margins.
Kim Eng maintains a BUY rating on the stock with a target price of S$0.465, assuming a 50% probability that Yongnam wins the Yangon International Airport project.
Now that Yongnam didn't win the Myanmar airports deals, perhaps this call and target might be under review.
Bearish analyst report
Bearish analyst report
Gary Ng, Vice President, Research at CIMB finds Q2 results to be below expectations.
The broker notes that the company's order book is 'glaringly' low at S$266 mln.
As 44% of the order book will be booked as revenue in the second half of the year, the company can't afford to let new contracts slip through its fingers.
As a result, CIMB fears those new orders might come at the expense of lower margins.
The broker has reduced its FY13-15 EPS forecasts by 22%-35% due to a lower revenue contribution from the higher-margin business division.
The broker feels the lack of convincing contract wins and a squeeze on margins are de-rating factors for the stock, despite the Myanmar angle.
Regarding the airport projects in Myanmar, the broker feels the company might have to go for a dilutive fund-raising if it were to execute the projects.
CIMB has downgraded the stock to UNDERPERFORM from OUTPERFORM with a lower target price of S$0.28 compared to S$0.36 previously.
Analyst Alfie Yeo at DBS Vickers also finds Q2 results below expectations due to weak margins.
Yongnam's first half earnings make about 36% of the broker's full-year estimate.
DBS Vickers feels the sentiment for the stock could wane if the winning bid for the Myanmar airports is not announced within a reasonable period of time.
Myanmar's Department of Civil Aviation was supposed to announce the winner of the Yangon International Airport project by the end of July.
Disappointed by a shallow order book and weaker margins, the broker has slashed its FY13 earnings estimate by 44% and FY14 earnings estimate by 25%.
DBS Vickers feels the earnings would pick up in FY15 when the contracts from the Thomson MRT Line begin to contribute.
DBS Vickers has downgraded the stock to FULLY VALUED with a sharply lower target price of S$0.28 compared to S$0.41 previously.
Investor Central. We keep your investments honest.
Question 1. Did it underestimate the cost to build the Hanthawaddy International Airport in Myanmar?
A consortium of Yongnam Holdings Ltd, Changi Airport Planners and Engineers Pte Ltd and JGC Corporation had bid for the construction and management of Hanthawaddy International Airport in Myanmar.
According to an announcement by SGX-listed TEE International Ltd, Yongnam was part of a special purpose vehicle (SPV) which would have owned a 60% stake in the consortium.
Yongnam would own a 50% stake in the SPV while TEE International Ltd and Samwoh Corporation Pte Ltd will equally own the remaining 50% stake in the SPV.
In other words, Yongnam would have owned a 30% effective interest in the consortium which would have built the Hanthawaddy International Airport.
The SPV might be news to shareholders of Yongnam. It certainly was to us. We couldn't find an announcement to this effect on the SGX website.
Shareholders of TEE International found out about the SPV sooner than investors in Yongnam.
While it declared its interest in the Hanthawaddy airport project on March 18, it was only on April 12 that it said this project would be undertaken through a Special Purpose Vehicle.
Investors tracking TEE International would have read about that on April 2.
We trust the management shared the details of the SPV at the EGM.According to Yongnam's circular, the US$100 mln (or S$124 mln) investment was about 35% of Yongnam's market capitalisation of S$353.75 mln on April 5.
That is what makes it a major transaction as per Rule 1006(c) of the listing manual (refer page 13 of the circular).
And that is why the company needed its shareholders' approval at an EGM.
Yongnam's shareholders approved the proposal at the EGM on April 29.
In the circular, Yongnam Holdings also said that the Hanthawaddy International Airport project was not expected to cost more than US$800 mln (refer page 10).
A report by Bernama, the national news agency of Malaysia, said the airport project would cost US$1 bln.
A recent report by The Wall Street Journal said the deal for Hanthawaddy International Airport was worth US$1.1 bln.
Therefore that leaves us confused about the actual cost of building the airport.
It also makes us wonder if Yongnam underestimated the cost of building the Hanthawaddy International Airport and possibly, this is one of the reasons for which it couldn't grab the deal.
Management Reply As with all contracts, the final contract value is only determined when the contract specifications and terms are finalized. Our Yongnam-CAPE-JGC consortium had estimated that the HIA airport project was not expected to exceed US$800 million, as detailed in our Circular to Shareholders dated 12 April 2013.
It is not our policy to comment on market speculation. Hence, we will not comment on the differing contract amounts being speculated in the media.
Question 2. What took it four days to announce to the shareholders its bid for the Yangon International Airport project?
Hanthawaddy International Airport was not the only project in Myanmar for which Yongnam had expressed interest.
A consortium of Yongnam Holdings Ltd, Changi Airport Planners and Engineers Pte Ltd and JGC Corporation had tendered for the Yangon International Airport project before April 25 – the deadline set by Department of Civil Aviation, Myanmar.
But this was announced on the exchange's website on April 29.
One wonders what took the company so long to announce it to its shareholders.
The announcement came just hours after the company's AGM and EGM concluded that day.
Management Reply We announced our consortium’s participation in the YIA tender immediately after we obtained shareholder approval on April 29th.
Question 3. What is the actual value of the Yangon International Airport project?
Myanmar's Department of Civil Aviation has not yet announced the winning bid for the Yangon International Airport on its website.
Kim Eng, in its latest research report (page 2), estimates the Yangon International Airport project to be worth US$150 mln.
Kim Eng also reveals that Yongnam had a 40% stake in the project.
That means Yongnam's share of the project is worth about US$60 mln (about S$74 mln).
The broker estimates the company will profit US$9 mln from the project.
Now, compared to the market capitalisation of S$353.75 mln mentioned by the company in April 12 circular, Yongnam's share of the Yangon International Airport project is comfortably less than the 20% threshold for a 'major transaction'.
But the calculations are meaningless if the Yangon International Airport project is worth US$200 mln, as claimed by Channel NewsAsia in a recent report.
Therefore it is important to know the actual size of the project.
Management Reply As with all contracts, the final contract value is only determined when the contract specifications and terms are finalized. We are therefore not in the position to provide a contract value as the final contract value of the YIA project rests with the Myanmar authorities.
Question 4. How much of the project would Yongnam own?
We don't know the source of Kim Eng's claim that Yongnam owns a 40% stake in the project.
Investors would appreciate if the company could confirm or correct Kim Eng's claim.
Management Reply We had not announced the proposed ownership breakdown of the consortium for which the exact nature and scope of involvement of each partner would typically only be finalized upon the award and finalization of the airport contract.
Question 5. Should it have sought shareholders' approval before bidding for the Yangon International Airport project?
If the project is indeed worth US$200 mln and Yongnam owns a 40% stake in it, its share of the project works out to be US$80 mln (about S$99 mln).
That is more than 28% of the company's market capitalisation.
Therefore that makes us wonder if it was a 'major transaction' and if Yongnam should have sought shareholders' approval before bidding for the Yangon International Airport project.
Management Reply Yongnam had obtained shareholder approval at an EGM held on 29 April 2013 for the proposed diversification into investing in infrastructure developments and proposed investment in HIA. There is no requirement to seek shareholders' approval to participate in the YIA tender.
Question 6. Has it provided for its entire exposure to Alpine Bau GmbH?
Yongnam was awarded a S$25 mln contract for the MRT Downtown Line 2 in August 2010.
The company's job was to support the main contractor, Alpine Bau GmbH (Singapore branch), in the supply, lease, installation and removal of steel struts and walers for the Tan Kah Kee Station and the Cut and Cover Tunnel.
Walers are a horizontal reinforcement utilized to keep newly poured concrete forms from bulging outward.
But now Alpine Bau GmbH is insolvent, just a couple of months before the contract was supposed to finish.
Yongnam has made a provision of S$5.1 mln for its exposure to the main contractor.
Looking at the size of contract, the provision is just 20% of it.
Therefore that makes us wonder if there is more to it than a S$5.1 mln provision.
Management Reply In our announcement dated 24 June 2013, we had stated our estimated exposure to Alpine's insolvency to be approximately S$5.0 million and we have made provisions for that. Our involvement with Alpine for the construction of MRT Downtown Line Stage 2 started in 2010. Over the past three years, we had billed and collected progressive payments by reference to the stage of completion of the contracted activities.
Question 7. Will the new contractor re-engage the company?
OCBC says "Yongnam's management remains hopeful of recovering at least some of the costs associated with its work on Downtown Line 2 if the new main contractor re-engages the firm".
The question is: will it?
Management Reply Having been involved in the project since day one, we are well-positioned to continue with the project till completion, with whichever new main contractor that the LTA may appoint.
We thank the management for its response.
Publish date: 20/08/13