Company Update, 30 October 2014

Yongnam Holdings (YNH SP)

Buy (Maintained)

Construction & Engineering - Construction Market Cap: USD187m

Target Price: Price:

SGD0.27 SGD0.19 Macro Risks

Scores Mega Myanmar Airport Contract

Growth Value

Yongnam Holdings (YNH SP) Price Close

Relative to Straits Times Index (RHS)

0.27

104

0.26

0.25

96

0.24 0.23

88

0 0 . 2 0 0 A consortium comprising Yongnam, Changi Airport Planners and . 0 Engineers and JGC Corp has officially been awarded a USD1.40bn 0 contract to design/construct/operate/maintain the Hanthawaddy 0 International Airport and its facilities for a 30-year concession period. We opine this could potentially catalyse earnings from FY15F, given contract clarity and good execution. Maintain BUY, with a RNAV-based SGD0.27 TP (42.1% upside).



0.22 0.21

80

0.20 0.19

72

0.17

0.17 30

64

25 20

15

 Sep-14

Jul-14

May-14

Feb-14

Dec-13

Oct-13

Vol m

10 5

Source: Bloomberg

Avg Turnover (SGD/USD) Cons. Upside (%) Upside (%) 52-wk Price low/high (SGD) Free float (%) Share outstanding (m) Shareholders (%) Seow Soon Yong Delta Lloyd Seow Soon Hee

0.24m/0.19m 0.0 42.1 0.19 - 0.27 76 1,267 10.6 10.0 2.2

  2  . 2 0 . 2

   



Garnering a mega USD1.40bn (or SGD1.78bn) project. The consortium has officially been awarded the contract to construct Myanmar’s landmark Hanthawaddy International Airport. This came after negotiations between the Myanmar Government and the consortium led by Incheon International Airport Corp of South Korea – which was originally awarded a similar contract in Aug 2013 – fell through. The contract would involve the construction of a domestic passenger terminal building with an annual capacity for 4.5m passengers, along with airfield facilities, an advance baggage handling system and other ancillary airport support systems. Potential earnings catalyst could be realised with good execution and contract clarity. This mega project could potentially be an earnings catalyst, if there is clarity over the forms of payment and financing for the winning bidder. Good execution would also be pertinent – the consortium would have to be able to deliver the construction services in the developing country, which may lack basic infrastructure such as electricity and water supplies presently. We will update the potential earnings to be garnered from this contract when we obtain further details on the contract terms and execution. Maintain BUY, with a RNAV-based TP of SGD0.27 (from SGD0.29). Yongnam currently still trades at below book value, ie 0.81x P/BV. This has likely factored in negatives such as a loss-making year (ie FY14). The mega USD1.40bn Myanmar Airport contract, if given contract clarity and strong execution, could potentially catalyse earnings and unlock value for Yongnam. Key risks are underwhelming execution and the lack of clarity over contract terms.

Share Performance (%) YTD

1m

3m

6m

12m

Absolute

(23.3)

(5.5)

(21.7)

(21.7)

(30.4)

Relative

(25.2)

(3.5)

(18.0)

(21.2)

(31.0)

Shariah compliant

Forecasts and Valuations

Dec-11

Dec-12

Dec-13

Dec-14F

333

302

362

286

275

Reported net profit (SGDm)

63.4

43.5

5.5

(17.1)

14.5

Recurring net profit (SGDm)

63.3

43.4

5.2

(17.3)

14.3

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

3.8

5.5

45.8

0.82

0.74

0.75

0.81

2

4

182

6

6

5.3

5.3

3.2

2.7

2.7 7.7

Total turnover (SGDm)

DPS (SGD)

Sarah Wong +65 6232 3883

Recurring P/E (x)

[email protected]

P/B (x) P/CF (x)

Terence Wong CFA +65 6232 3896

Dividend Yield (%)

[email protected]

EV/EBITDA (x)

na

Dec-15F

na

16.6 0.79

3.1

4.2

11.2

29.6

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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1

Yongnam Holdings (YNH SP) 30 October 2014 Figure 1: RNAV calculation SGDm

SGD/ton

Book value of Strutting Assets (185,000 tons)

248

1,341

SGD per share

Replacement cost of Strutting Assets (185,000 tons)

296

1,600

Valuation surplus on Strutting Assets (185,000 tons)

48

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) 30 October 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) 30 October 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) 30 October 2014

SWOT Analysis  Largest market share in structural steelworks in Singapore, with a 84,000-tonne 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

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

3600%

30%

Jan-14

160

1

Jan-13

4300%

Jan-12

5000%

180

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 in structural steelworks and specialist civil engineering.

See important disclosures at the end of this report

5

Yongnam Holdings (YNH SP) 30 October 2014

Recommendation Chart Price Close Recommendations & Target Price

0.29

na

0.41 0.36

0.31 0.26 0.21 Buy 0.16 Oct-09

Neutral

Feb-11

Sell

Trading Buy

May-12

Take Prof it

Not Rated

Aug-13

Source: OSK-DMG, Bloomberg Date

Recommendation

2014-08-18

Buy

Target Price Price 0.29

0.22

2014-04-17

Buy

0.29

0.24

Source : OSK-DMG, Bloomberg

See important disclosures at the end of this report

6

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