Now a rag doll?
Contractors are battling a harsh operating environment and YNH is no exception. Its initial Myanmar catalyst came to an abrupt end recently. Unfortunately, new orders from elsewhere are also missing.
Our target price remains set at 5x CY15 P/E, its 3-year mean. A lack of convincing contract wins and margin squeeze are de-rating catalysts, in our view. Under our revised rating structure, our rating changes from Underperform to Reduce.
Cost overruns; thinning order book
Earnings could remain lacklustre next year due to an unfavourable revenue mix and reduced contributions from higher-margin specialist civil engineering work. Although contributions from structural steelwork (SS) will continue to flow in, cost overruns for ongoing SS projects are a big negative. YNH had in the past demonstrated stellar execution but we fear that cost overruns will become a common feature in 2014 with the group‟s existing workload. Its biggest problem is a thinning order book. Current outstanding order book of S$229m is glaringly low, by YNH‟s standards. Contract-win rates have decelerated considerably.
Watch out for balance-sheet discipline
As the group attempts to catch up on new awards, we are also worried that any new contracts will come at the expense of margins. Net gearing has risen to 0.4x (from 0.25x nine months ago), although this is less of a concern given its current cashflow management. For future projects, balance-sheet discipline may become more important.
No reason to own this stock
With its dimming Myanmar prospects, investors are left viewing YNH as a standalone strutting-steel provider. But the current operating environment is not conducive for this business.
Publish date: 29/11/13