Yongnam: Buy since price is more reasonable now?

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.