Results Review, 18 August 2014

Yongnam Holdings (YNH SP)

Buy (Maintained)

Construction & Engineering - Construction Market Cap: USD219m

Target Price: Price:

SGD0.27 SGD0.22 Macro Risks

Recovery To Be Pushed Back To FY15F

Growth Value

Yongnam Holdings (YNH SP) Relative to Straits Times Index (RHS)

0.30

113

0.28

104

0.26

96

0.24

88

0.22

79

0.20 80 70 60 50 40 30 20 10

71

Source: Bloomberg

Avg Turnover (SGD/USD)

0.47m/0.38m

Cons. Upside (%)

0 0 .2 0 0 Yongnam is likely only to see a turnaround in FY15, as project order . 0 wins are coming in slower than expected. With fixed costs every quarter 0 and facing cost overruns in projects like the National Art Gallery and 0 South Beach Development, it is likely to post losses for FY14. However, Yongnam continues to trade at below book, ie 0.93x P/BV, making the downside limited. Maintain BUY with a lower RNAV-based SGD0.27 TP.





Jun-14

Dec-13

Feb-14

Apr-14

121

Oct-13

0.32

Aug-13

Vol m

Price Close



-13.6

Upside (%)

34.9

52-wk Price low/high (SGD)

0.22 - 0.31

Free float (%)

76

Share outstanding (m)

1,267

Shareholders (%) Seow Soon Yong

10.6

Delta Lloyd

10.0

Seow Soon Hee

2.2

  2  . 2 0 . 2

   



FY14 is likely a loss-making year. Yongnam reported a loss of SGD5.3m in 2Q14, bringing total losses to SGD7.2m for 1H14. This was against a 32.3% y-o-y decrease in revenue to SGD133.4m in the first half of FY14. The losses were attributable to: i) cost overruns in projects due to design engineering issues – eg the National Art Gallery and South Beach Development, and ii) unallocated overheads (fixed costs) of c.SGD6m-7m every quarter at the gross level. With these in mind, and the fact that new project order wins may only come in 4Q14, we estimate that FY14 will likely be a loss-making year and that margins recovery may only see marked improvement in FY15 onwards. Note that, despite the losses, Yongnam is still EBITDA positive at SGD1.4m. Reducing earnings estimates for FY14. Due to the above, we reduce our earnings estimates to a SGD17.3m loss in FY14 from a profit of SGD8.3m previously. Project order wins likely to come in 4Q14, contributing to a recovery in FY15. Instead of 3Q14, potential project order wins – such as Project Jewel @ Changi Airport and the Hong Kong Mass Transit Railway (MTR) extension – are likely to come in 4Q14. This is expected to push recovery to FY15 instead of 2H14 previously. Maintain BUY, TP adjusted down to RNAV-based SGD0.27 (from SGD0.29). As we now expect FY14 to be a loss-making year, thereby impacting the book value that we used to value Yongnam, we adjust TP down to SGD0.27. Although recovery is expected to be pushed back to FY15, the stock continues to trade at below book, ie 0.93x P/BV. This has likely already factored in a loss-making year. Maintain BUY.

Share Performance (%) YTD Absolute Relative

(12.3) (16.3)

1m (10.4) (10.5)

3m (12.3) (13.0)

6m (10.4) (18.8)

12m

Forecasts and Valuations

Dec-11

Dec-12

Dec-13

Dec-14F

333

302

362

286

Dec-15F 275

43.5

5.5

(17.1)

14.5 14.3

(18.9)

Total turnover (SGDm)

(21.2)

Reported net profit (SGDm)

63.4

Recurring net profit (SGDm)

63.3

43.4

5.2

(17.3)

Recurring net profit growth (%)

16.9

(31.5)

(88.0)

(432.5)

Recurring EPS (SGD)

0.05

0.03

0.00

(0.01)

0.01

0.010

0.010

0.006

0.005

0.005

4.3

6.3

52.4

0.93

0.84

0.86

0.93

3

4

208

6

7

4.7

4.7

2.8

2.3

2.3 8.4

Shariah compliant

Sarah Wong +65 6232 3883 [email protected]

DPS (SGD) Recurring P/E (x) P/B (x) P/CF (x)

Terence Wong CFA +65 6232 3896

Dividend Yield (%)

[email protected]

EV/EBITDA (x)

na

na

19.0 0.90

3.4

4.6

12.2

32.3

Return on average equity (%)

24.1

14.2

1.7

(5.6)

4.9

Net debt to equity (%)

22.1

25.5

46.6

48.3

45.9

(148.8)

(64.7)

Our vs consensus EPS (adjusted) (%) Source: Company data, OSK-DMG

See important disclosures at the end of this report

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Platform

1

Yongnam Holdings (YNH SP) 18 August 2014 Figure 1: RNAV workings SGDm

SGD/tonne

Book value of strutting assets (185,000 tonnes)

248

1,341

Replacement cost of strutting assets (185,000 tonnes)

296

1,600

Valuation surplus on strutting assets (185,000 tonnes)

48

SGD/share

0.038

Total net asset value (as at end-FY14F)

293 0.231

RNAV

341 0.269

Source: OSK-DMG

See important disclosures at the end of this report

2

Yongnam Holdings (YNH SP) 18 August 2014

Financial Exhibits Profit & Loss (SGDm)

Dec-11

Dec-12

Dec-13

Dec-14F

Total turnover

333

302

362

286

275

Cost of sales

(229)

(226)

(323)

(280)

(234)

Gross profit

104

76

38

6

41

Gen & admin expenses

(27)

(24)

(31)

(21)

(21)

Operating profit

77

52

7

(16)

20

Operating EBITDA

99

77

35

13

49

(22)

(25)

(27)

(29)

(29)

7

(16)

Depreciation of fixed assets Operating EBIT Net income from investments

77 2

52 -

-

-

Dec-15F

20 -

Interest income

0

0

0

0

0

Interest expense

(3)

(3)

(3)

(4)

(4)

0

0

0

0

0

75

49

4

(19)

16

Other non-recurring income Pre-tax profit Taxation

(12)

(5)

1

2

(2)

Profit after tax & minorities

63

44

6

(17)

14

Reported net profit

63

44

6

(17)

14

Recurring net profit

63

43

5

(17)

14

Source: Company data, OSK-DMG

Cash flow (SGDm)

Dec-11

Dec-12

Dec-13

Dec-14F

Dec-15F

Operating profit

77

52

7

(16)

20

Depreciation & amortisation

22

25

27

29

29

Change in working capital

(4)

(7)

(39)

31

5

3

14

100

74

9

44

0

0

0

0

0

(3)

(3)

(3)

(4)

(4)

Other operating cash flow Operating cash flow Interest received Interest paid Tax paid Cash flow from operations Capex Other investing cash flow Cash flow from investing activities Dividends paid Proceeds from issue of shares

-

(4) 45

0

(7)

(4)

2

(2)

97

64

1

42

39

(51)

(68)

(56)

(30)

(30)

6

7

11

-

-

(45)

(61)

(45)

(30)

(8)

(13)

(13)

(6)

1

1

1

-

(30) (6) -

Increase in debt

(27)

2

69

Other financing cash flow

(10)

(11)

(10)

Cash flow from financing activities

(44)

(20)

47

9

(1)

21

28

11

15

36

Cash at beginning of period Total cash generated

7

(17)

3

Forex effects

(0)

(0)

(0)

Implied cash at end of period

28

11

15

15 -

5 -

21 36

8 44

Source: Company data, OSK-DMG

See important disclosures at the end of this report

3

Yongnam Holdings (YNH SP) 18 August 2014

Financial Exhibits Balance Sheet (SGDm)

Dec-11

Dec-12

Dec-13

Dec-14F

Dec-15F

Total cash and equivalents

28

11

15

36

44

Inventories

80

72

64

55

53

123

137

154

126

121

Accounts receivable Other current assets Total current assets

4

5

8

7

7

235

225

241

224

225

Total investments Tangible fixed assets

1

0

0

0

0

303

346

357

358

360

Total other assets

-

2

2

2

2

Total non-current assets

303

348

359

361

362

Total assets

538

573

600

585

587

Short-term debt

78

83

51

62

64

Accounts payable

77

79

61

53

44

Other current liabilities

35

30

20

20

18

190

193

131

135

126

Total long-term debt

14

10

112

115

119

Other liabilities

43

47

41

41

41

Total non-current liabilities

57

58

153

156

160

247

250

284

292

286

94

96

96

96

96

170

201

194

171

179

Total current liabilities

Total liabilities Share capital Retained earnings reserve Other reserves

27

26

26

26

26

Shareholders' equity

291

323

316

293

301

Total equity

291

323

316

293

301

Total liabilities & equity

538

573

600

585

587

Dec-11

Dec-12

Dec-13

Dec-14F

Dec-15F

(0.7)

(9.4)

19.9

(20.9)

(3.9)

4.3

(32.5)

(86.3)

(322.8)

0.0

Net profit growth (%)

16.5

(31.3)

(87.3)

(409.1)

0.0

EPS growth (%)

16.5

(31.3)

(87.3)

(409.1)

0.0

Bv per share growth (%)

23.7

10.9

(2.1)

(7.4)

2.8

Operating margin (%)

23.0

17.1

2.0

(5.5)

7.3

Net profit margin (%)

19.0

14.4

1.5

(6.0)

5.3

Return on average assets (%)

12.0

7.8

0.9

(2.9)

2.5

Return on average equity (%)

24.1

14.2

1.7

(5.6)

4.9

Net debt to equity (%)

22.1

25.5

46.6

48.3

45.9

0.010

0.010

0.006

0.005

0.005

0.08

0.05

0.00

0.03

0.03

Source: Company data, OSK-DMG

Key Ratios (SGD) Revenue growth (%) Operating profit growth (%)

DPS Recurrent cash flow per share Source: Company data, OSK-DMG

See important disclosures at the end of this report

4

Yongnam Holdings (YNH SP) 18 August 2014

SWOT Analysis  Largest market share in structural steelwork in Singapore with 84,000 tonnes of steel fabrication capacity

 Construction labour shortages in Singapore

 Leader in specialist civil engineering with 185,000 tonnes of strutting steel assets

 Subject to fluctuating steel prices  Subject to the cyclical nature of the construction industry

 Construction boom with large-scale infrastructural developments in Singapore  Trend of steel construction displacing reinforced concrete  National productivity drive favours the use of construction materials such as prefabricated steel

 Potential cost overruns from project delays  Subject to customer/counterparty credit risks

P/E (x) vs EPS growth

P/BV (x) vs ROAE

3600%

140

2900%

120

2200%

100

1500%

80

800%

60

100%

P/E (x) (lhs)

Jan-15

-2000%

Jan-14

0

Jan-13

-1300%

Jan-12

-600%

20

Jan-11

40

EPS growth (rhs)

Source: Company data, OSK-DMG

1

23%

1

17%

1

10%

0

3%

0

-3%

0

-10%

P/B (x) (lhs)

Jan-15

160

30%

Jan-14

4300%

Jan-13

180

1

Jan-12

5000%

Jan-11

200

Return on average equity (rhs)

Source: Company data, OSK-DMG

Company Profile Yongnam Holdings is a leading Singapore based multi-discipline engineering and construction services provider with more than 30 years of experience. Its key businesses are structural steel works and specialist civil engineering.

See important disclosures at the end of this report

5

Yongnam Holdings (YNH SP) 18 August 2014

Recommendation Chart na

0.29

Price Close 0.39 Recommendations & Target Price 0.37 0.35 0.33 0.31 0.29 0.27 0.25 0.23 0.21 Buy Neutral 0.19 Aug-09 Nov-10

Sell

Trading Buy

Mar-12

Take Prof it

Not Rated

Jun-13

Source: OSK-DMG, Bloomberg Date

Recommendation

2014-04-17

Buy

Target Price Price 0.29

0.24

Source: OSK-DMG, Bloomberg

See important disclosures at the end of this report

6

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