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Yongnam: Worried about warrants?

Saturday, July 14, 2012


Yongnam has been doing very well in recent years. Its management also shows a commitment in sharing the fruits of its achievements with shareholders as it paid steadily higher dividends in the last four years.

Yongnam's order book remains robust although its Q1 revenue and profit declined due to delays in starting up of a couple of projects. Is this why its share price has been languishing? Does Mr. Market expect Yongnam to underperform from this year on?

Well, to be fair, the broader market has been languishing too. It remains to be seen whether the 3,000 points pyschological resistance on the STI could be overcome.



With Yongnam, I am not so worried about its fundamentals. In fact, I expect the company to win more contracts as regional governments spend more on infrastructure projects. This will generate steady revenue for the company. With increasing contribution from its specialised civil engineering arm, profits are likely to improve at a steady clip.

What could be holding back its share price is its outstanding warrants. Warrants? Yes, the company had a 3 for 10 warrants issue in 2007. 3 for 10 is quite a big proportion. If all the warrants were exercised, we could see a 23% dilution in EPS. Then, its shares would look more expensive.

So, the question is whether Yongnam is able to make use of the funds productively to improve its EPS proportionally or more to negate any dilution concerns. This is something that no amount of foresight would be able to throw light on. So, a cautious Mr. Market is understandable.


Now, I would like to suggest that it is possible that holders of the warrants might not exercise the warrants. Reason? The exercise price is 25c a piece. With Yongnam's share price at 23.5c at the last closing, these holders could be better off allowing the warrants to expire and buying more shares of the company in the open market if they wanted to add to their long positions.

Also, if I remember correctly, the warrants were not free. They were sold at 3c a piece. So, the full price of a warrant turned share is actually 28c for the original warrant holders.

There are rather bullish 12 months target prices for Yongnam's shares by various research houses from 30c or so upwards. Unless Yongnam's share price is able go past 25c a piece, the exercise price of its warrants, I doubt holders would exercise their warrants and worries of dilution would evaporate, therefore.

The warrants expire 14 Dec 2012. That is only five months away. I guess I can only wait and see.

Related posts:
1. Yongnam: 3 new contracts worth $63.8m
2. Yongnam: FY2011 results.

7 comments:

CS said...

Hi AK, Your comments on Yongnam's warrants come at the right time as I contemplate to add a little more yongnam shares to my small holdings. I totally agree that it is very unlikely warrant holders will convert their warrants at current price if their all-in cost is 25cents or more. At 28cents, the share price will have increased by about 21% and from there up side looks limited, given the very volatile market conditions. As you mentioned, fundamentals of the company are not a concern. I think the on going investigation concerning insider trading may have kept some investors away as any negative developments from the final findings may impact on the company's reputation and may result in changes in its management. However, I believe the company is well-organized and enjoys a strong position in the industry it operates in. The leaving of a key personel should not affect the future of the company too much. Supposing all the warrants are converted, this will slightly increase the company's NAV and reduce its gearing. The proceeds can also be used to improve earnings or reduce borrowings and hence lower cost of borrowings. Personally I think the prospect is good and price can improve once the clouds are cleared. 22cents is my target price to buy more.
Regards,
CS

AK71 said...

Hi CS,

22c is where we should find some support. If it should be retested, we could see strong buying interest.

Personally, I do not believe that the CEO would leave the company even if he were to be found guilty of insider trading. He could face a fine but that is not going to derail the company's business or be significant enough a transgression to call for his resignation.

Yes, I am waiting for the clouds to part and, hopefully, reveal a shining moon. ;)

AK71 said...

A good read:

Yongnam: Meeting with CEO.

NextInsight, 22 July 2012.

AK71 said...

Yongnam Holdings, the structural steel contractor and specialist civil engineering solutions provider, today reported a net profit of $12.1 million for the three months ended June 30, 2012 (2QFY2012).

Net profit was down 19.7% from $15.1 million in the corresponding quarter the previous year (2QFY2011), on a 5.4% dip in revenue from $82.5 million in 2QFY2011 to $78.1 million in 2QFY2012.

With the completion of Gardens by the Bay, the substantial completion of Vista Exchange at One North as well as Mumbai International Airport, Yongnam saw a decrease of 24.2% in revenue from Structural Steelworks, from $42.5 million in 2QFY2011 to $32.2 million in 2QFY2012. For the quarter under review, ongoing projects like Singapore Sports Hub, NUH Medical Centre and the Petrochemical Plants at Jurong Island were the key contributors to Structural Steelworks revenue.

Increased contributions from the Group’s Marina Coastal Expressway, MRT Downtown Line 2, MRT North-South Line Extension and Hong Kong MTR contracts led to a 14.6% increase in revenue from Specialist Civil Engineering, which grew from $40.0 million to $45.9 million during the same period.

Gross profit registered a 15.8% decrease to $20.5 million in 2QFY2012 on lower margins resulting from the completion of iconic higher-margin projects last year. Gross margin for 2QFY2012 was 26.3% compared to 29.6% in 2QFY2011.


The EDGE, 6 August 2012.

AK71 said...

In 2Q12 alone, the group secured
three contracts worth a total of
S$64m. Its order book remains at a
healthy S$475m, of which 35% will be recognised in 2H. However, we are reducing our FY12 EPS because of new revenue and margin assumptions.

Yongnam should be able to meet our
revised FY12 forecast given the strong pipeline of projects that it is bidding for. Also, we expect two delayed projects to be ramped up in 2H12.

There is no shortage of new projects that Yongnam is looking at, worth S$1.4bn in total. Of these, S$860m worth of projects are expected to commence later this year. We continue to believe in the group’s ability to win accretive projects, both
in Singapore and overseas.


CIMB, 6 August 2012.

Yongnam: 2Q FY12 Results Note

AK71 said...

Yongnam Holdings, the structural steel contractor and specialist civil engineering solutions provider, has secured a significant project worth $21.3 million.

The project involves the supply, fabricate, surface-treat and deliver 7,000 tonnes of structural steel for a belt conveyor structure for German company, Beumer Maschinenfabrik GmbH & Co. KG in Lumut, State of Perak, Malaysia.

Yongnam says this is the group’s first significant project in Malaysia since its last major project at Tanjung Bin Power Plant in 2005, and will be undertaken by the group’s wholly-owned Malaysian subsidiary, Yongnam Engineering Sdn Bhd.

The project is expected to be completed in the third quarter of 2013.


The EDGE, 29 Aug 12.

AK71 said...

Going forward, margins are expected to normalize without contribution from iconic projects such as Marina Bay Sands. Compare to peers, Yongnam still commands more attractive gross and net margins of 26.3% and 15.5% as of 2Q12 as it deals with the downstream processing, compare to steel traders and suppliers. (Gross: 16.3% and net: 8.7%).

Yongnam’s share price has lagged the sector due to 3-for-10 warrants issued at SGD0.03 in 2007. It has an outstanding balance of 364.3m warrants which will expire on 14 Dec 2012, with a conversion price of SGD0.25. Full conversion of the warrants will result in a 29% dilution to EPS.

ith a solid track record on infrastructural projects, Yongnam will continue to thrive in the resilient public sector. It now trades at FY11 PER of 4.6x and P/B of 1.0x compared with sector hist. P/E of 5.3x. Although it does not have a dividend policy, it has an average payout ratio of 16%.


Kim Eng, 27 Sep 12.

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