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Yongnam: A chance to accumulate cheaper.

Tuesday, August 6, 2013

If anyone is still wondering why Yongnam's share price plunged today, it is due to a 28.6% drop in quarterly net profit, year on year. The weakness in share price now has a reason.

The question to ask is whether this drop in net profit is because of an enduring change in Yongnam's businesses or is it a one off event?

Yongnam posted a quarterly net profit of S$ 8.6 million attributable to shareholders which is lower than the S$ 12.1 million a year ago. This is after a S$ 5.1 million provision for doubtful debt because Alpine Bau GmbH, the main contractor for the Downtown Line 2 MRT project, went bust.

Now, if this had not happened, Yongnam would actually have seen a 13.2% growth in quarterly net profit, year on year, instead. This tells me that Yongnam's underlying businesses are probably still doing well and that this provision, as long as it does not become a regular occurrence, does not have any long term impact.

There are three other points which I want to highlight:

1. Gearing has gone up a notch to 0.45x. This is not a bad thing if the borrowings are able to generate greater returns but we should always keep an eye on gearing.

2. Gross margin in the last quarter went under 20% to 19.4%. Ignoring the provision for doubtful debt, net margin is 11.9% which is still pretty good for a construction company but it tells us of the existence of rather significant cost pressure.

3. First half EPS now stands at 1.59c. Unless the second half results are so abysmal as to be a loss of more than 0.59c, Yongnam is fully capable of paying a dividend this year and going by what happened in the last two years, it would probably happen.

I put in a buy order at 28c last night and the stock also hit a low of 28c a share today. A total of 17 lots changed hands at 28c but, fortunately or unfortunately, my order was not filled.

If Mr. Market should continue to feel rather depressed about Yongnam in the coming sessions, I will make use of the opportunity to accumulate.

See Yongnam's presentation: here.

Related post:
Yongnam: Buy since price is more reasonable now?


SG Young Investment said...

Hi AK,

Thanks for the analysis :)

Have been looking at construction companies and this is one which stands out. It is when the market is irrational that rational investors can buy at a good value.

AK71 said...

Hi SG Young Investment,

Well, you know what they say about taking care of the downside and the upside should take care of itself. :)

In Yongnam's case, at current share price, it isn't expensive. I like to think that it is closer to fair value.

Like I shared in an earlier blog post on Yongnam, paying a small premium above NAV to own the stock is reasonable because its assets offer an advantage against the competition. NAV/share is now a bit more than 26c.

Technically, the 100w MA is at 26c. So, if share price moves below the immediate support tomorrow and does not recover, we could see 26c next. To me, it is obvious what to do then. ;)

SG Young Investment said...

Hi AK,

You're right! The stock is holding at its 200D MA currently which is at 0.28. That's why got people queue at 0.28. I do hope it goes lower. :p

If the market is good tomorrow, we should see it moving up and holding at its immediate support.

AK71 said...

Hi SG Young Investment,

I have already put in my buy orders. LOL. Crossing fingers.

Actually, since I already have a long position in the stock, it really doesn't matter which way it moves. :)

seefei said...

I like one-off bad news and negative market reaction. Always present a good buying opportunity.

AK71 said...

Hi seefei,

Then, we must hope that Mr. Market does not recover too quickly from his depression as well. ;p

Tan said...

Hi AK,

Yongnam might suffer another setback on monday. They are not awarded Mynmar Airport contract

AK71 said...

Hi Tan,

Actually, that might be a good thing. A BOT project as huge as that would be a big CAPEX item with benefits only to be seen many years later.

Of course, we will have to wait and see how Mr. Market reacts on tomorrow.

If the stock should fall significantly in price, I know what I would do. :)

Gary said...

Hi AK71,

Something to share on Yongnam. Source is taken from Biz Daily.

AK71 said...

Hi Gary,

Thanks for sharing the link. :)

AhJohn said...

Hi AK, any view about construction companies? As this time national rally, many mega projects were announced.

AK71 said...

Hi Ah John,

Yongnam is going to be a natural beneficiary and it is now trading at below its NAV of 26c per share.

Imagine having part ownership of the kind of assets Yongnam has at a discount! I think it is a good deal, don't you?

However, technically, Yongnam's share price could drift lower and as I already have a significant long position, I am in no hurry to buy more.

I am simply waiting for clearer signs of bottoming before accumulating. :)

AhJohn said...

Thanks AK. Do you have some companies in mind as listen to national rally?

AK71 said...

Hi Ah John,

Actually, no. I think my plate is quite full now. So, I am not really thinking of looking at other stocks. :)

teny123 said...

hi ak,
any view for its latest PROFIT GUIDANCE ?

AK71 said...

Hi teny,

I am not really concerned and, in fact, used this chance to add to my long position. I hope to have some time to blog about this later today.

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