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Yongnam: Buy since price is more reasonable now?

Sunday, August 4, 2013

Yongnam's share price has been declining and in the last session, it closed at 31c. Now, this got my attention.

I initiated a large long position in Yongnam at 24.5c and have collected two rounds of dividends. I have also divested three quarters of my investment in the company by now as its share price rose. As I started divesting a bit too soon, I estimate that only two third of my remaining long position is free of cost.

Including dividends collected, however, close to 90% of my long position is free of cost. Remaining long position still shows a 26% paper gain even after the decline in the last session. All in all, this has been a pretty good investment for me.

So, why do I like Yongnam?

Yongnam is a natural beneficiary of the planned expansion of the MRT network in Singapore. It is a leader in the provision of structural steelworks, specialist civil engineering and mechanical engineering services. It has a proven track record even in Hong Kong, having clinched many contracts in the territory's MTR network expansion, the latest of which was announced on 25 June 2013. Why won't its businesses be chugging along nicely?

Yongnam's competitive advantage is to a large extent due to its massive investment in reusable steel struts. To have such assets and in such quantity like they have at today's price is not easily achievable and this presents a high barrier to any potential competitor. That was also a reason why I thought paying a price slightly above its NAV was acceptable when I got in at 24.5c.

The updated NAV/share on 31 March 2013 for Yongnam was 26.5c. So, my buy price is now at a discount to its NAV. This is a positive development.

I also like how Yongnam has plans for a recurring income base although this will take many more years to bear fruits. An example of this is a joint venture for the construction and management of an international airport in Myanmar. Result of that tender exercise has yet to be released, I believe.

When this news was made known, many people chased the share price of Yongnam and it hit a high of 38.5c not too long ago. This was all based on speculation. There was no certainty that Yongnam would get the contract and even if the consortium it is a part of should get the contract, it would not see immediate benefits. With share price at 31c now, probably, many got burnt.

Isn't Yongnam a good stock? Yes, qualitatively and quantitatively, I believe so. So, why did this happen? Well, even with a good stock, the more prudent thing to do is to wait for a pull back to what is a more reasonable valuation before buying.

Is the valuation more reasonable now at 31c a share since I said it got my attention. Well, it is definitely more reasonable now than at 38.5c! That is a safe answer to give. OK, end of blog post. Kidding!

Let us look at earnings? 1Q EPS was 0.91c. If we annualise this, we get 3.64c which gives us a PER of 8.52x with a share price of 31c. At 38.5c, the PER was 10.58x. Remember that all these calculations do not take in probable improvement in EPS in future quarters.

If we are conservative, buying at NAV is probably a good idea. However, I would say that paying a small premium to its NAV is acceptable. I liken it to paying a higher price for a powerful weapon in a fantasy RPG game that will give me an unfair advantage over others. Evil grin!

As usual, I am corrupted by TA and if we look at the chart, the longer term uptrend is still intact if we take reference from the 200d MA which is still rising. It now approximates 29c. This is a long term MA and is expected to provide stronger support although it does not mean that price might not whipsaw which could see 27.5c as a possible target.

So, I should rush to put a buy order at 27.5c? Remember, TA is about probability and not certainty. A smallish hedge at the 200d MA might not be a bad idea.

Reminder: I am talking to myself.

Results announced on 15 May 2013: here.

Related posts:
1. Yongnam: Investing in infrastructural developments.
2. Yongnam: 1c dividend per share.


JCK said...

Was going to ask you on Yongnam!
Very timely.

BTW its dangerous to talk to oneself!

Talk to US! thumbsup*

AK71 said...


If you say I am a crazy nut for talking to myself, I understand, but dangerous? Why is it dangerous? I am lost. ;p

I think talking to others is dangerous. Chinese has a saying: 祸从口出. LOL.

JCK said...

I no comprehend Chinese.

Crazy nut..zats the danger. :)

AK71 said...

I Googled for you:

祸从口出: [Huo cong kou chu.] Trouble emanates from careless talk. v. to bring disaster upon; to harm.


Gary said...

Hi AK71, would you consider book order as part of your assessment? I realised that OKP has a slight different meaning...

AK71 said...

Hi Gary,

Do you mean order book?

Order book is important because it provides some guidance on income visibility.

I am not familiar with OKP. Would you like to give a more detailed comment on what is your concern?

Gary said...

Hi AK71,

Sorry to make the mistake. Yes, you are right that the correct term is called order book.

For OKP, my brother and I find that OKP considers projects undelievered to be of value and should be factored into the financial statements. That rationale caused my "alarm bell" to ring. I thought that projects which have not been completed and delievered the goods and services should not been computed. I thought it would only be right if OKP includes what the contract is valued. Subesequent payment milestone is to be reflected accordingly to the date of received in that particular FY. That's my opinion.

AK71 said...

Hi Gary,

Investor Central did all of us a favour in sending the management questions regarding this:

What is the actual state of its order book?

We just don't get it.

As at April 30, 2013, OKP Holdings' order book was S$393.5 mln (refer page 33 of the earnings report).

Both, OCBC and DBS Vickers feel the company's order book is "healthy".

OCBC justifies the comment saying the order book of S$393.5 mln is 12.3 times OKP's Q1 revenue.

The problem is that this doesn't gel with how the company assesses its order book.

In November last year, replying to Investor Central's query about its order book calculation, OKP Holdings said 'A project will only be removed from the order book upon 100% completion'.

In other words, it recognises revenue from the project progressively, depending on how much of it has been completed.

But the project is removed from the order book only after it is 100% completed.

It follows, that OKP Holdings' S$393.5 mln order book on April 30, 2013 also includes those portions of projects which have already been completed and the revenue has been booked.

The problem for investors is that they have no way of knowing how much of that S$393.5 mln order book has already been booked as revenue, and how much of it is actual orders outstanding.

Then, what is the basis for OCBC's comparison of order book and Q1 revenue?

This draws into question how the brokers can claim the order book is "healthy" when nobody knows the actual outstanding order book of the company.

It therefore also renders the broker's recommendations and price target unreliable.

That makes it all the more important to know the real order book of the company.

Management Reply:
Our order book stands at S$393.5 million and the projects are expected to last till 2015.

(AK71: Duh....)

Why is OKP keeping projects in the order book until 100% completion, but booking revenue progressively?

This is bound to lead to confusion, and it's difficult to understand why such a policy would be adopted in the first place.

Management Reply:
This is in line with our company policy. However, we are open to exploring other ways of updating our order book, to best reflect the progress we have made.

(AK71: Duh... Er... )

Are you happy with OKP's IR department's replies? I know I am not.


Gary said...

Hi AK71

Thanks for the quick response. But just a curious, your comments are labelled with AK71 in your recent reply?

AK71 said...

Hi Gary,

Yup. I was wondering how to respond but couldn't manage anything more than a "duh" or "er". ;p

MrNg said...

Hi AK,

I am not too excited about the BOT business model that they are getting into at Yangon, such business while generating stable recurring income over a long period I time ( concession years) have long gestation periods and during this period burn a lot of cash. Look at the water companies that operate such a model, their FCF is volatile at best and sometime non- existence during this period. That will probably affect dividend and hence yield at the short term. Given yongnam cash is not terrible strong and yield is very attractive to start with, I value the company as fair even at current price of 28 cents. I didn't dug deep into the potential of the steel business, that could provide some margin of safety if they can get the volume to offset the low margin. But buying for yield and betting on the BOT is a wrong match IMO.

Just my 2 cents honest worth. :) sorry for being the devil advocate

AK71 said...

Hi Mike,

Yup, you are right about the long gestation period of the BOT model. There is no free lunch, unfortunately. :(

However, Yongnam's current businesses bring home the ham as and when projects are completed which makes for lumpy earnings. So, I still like the BOT idea for a recurring income base.

I remember that Yongnam already has a loan facility in place to finance the project in Myanmar although it is not certain that it would be awarded to the consortium it is a part of. A higher gearing level if it should be successful at the tender is to be expected, unfortunately.

If we are investing for income, for sure, Yongnam does not look like a natural choice. Yongnam is a cyclical but one with a considerable moat. The will to pay out a regular dividend is there and that is half the battle won. Whether they are able to do it is the other half.

Yongnam is not in the steel business per se, is it? It has a huge stock of reusable steel struts for construction purposes. Is this what you are referring to?

Thanks for the comment. I appreciate it very much!

coven said...

yongnam strong run again. lucky AK71 again :)

any thoughts on chip eng seng ? :)

AK71 said...

Hi coven,

I don't know enough about Chip Eng Seng to say anything really. Perhaps, there are readers who are better positioned to share their thoughts here. :)

Solace said...

Hi AK,

I initiated long position on yongmam at 24 cents today.

3Q FY2013 financial result may not be strong.The Group is expected to record an operating loss,
notwithstanding a healthy increase in revenue.

Source: from SGX

But this has provides a opportunity to load up this stock. fundamentally wise, i do not have much worries. Cost overuns is one of the risk factor for construction companies and loss on disposal of some fixed assets should be a one off and non-occurring events.

i am a long term investor and fairly confident that i have done my homework. :)

AK71 said...

Hi Solace,

Incidentally, I bought some today as well. I am putting in the finishing touches to a blog post on the same topic. :)

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