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Yongnam: DPS of 0.6c.

Friday, February 28, 2014

With plans to double the MRT lines in Singapore by 2030 and with more public sector construction projects, investing in Yongnam seemed like a natural choice and I have blogged about this many times over the last couple of years.

Unfortunately, last year was a very bad year for Yongnam and they presented a more or less expected set of nightmarish numbers for FY 2013. To be fair, the management already warned way ahead of time that numbers are likely to be bad. So, no one was caught unaware and Mr. Market seemed to have taken the results in his stride. Yongnam did not see any big plunge in share price.

In summary, the problems were:
1. Significant cost overruns in 3 projects.
2. $8.1 million loss in selling off some steel pipe piles.
3. $5.1 million provision for bad debt.
4. Additional costs from alteration works for 2 projects.

All these meant that net profit fell 87% to $5.5 million, year on year, although revenue rose 20% to $362 million. ROE fell from 15.9% to just 1.3%. EPS fell from 3.45c to just 0.44c.

In an earlier blog post on Yongnam, I said that the question to ask was whether the problems were one off events or recurring in nature. If we believe that they are one off events and that Yongnam's business is still fundamentally sound, then, we should make use of market weakness to accumulate its stock.

Yongnam's order book stood at $340 million at the end of 2013. $185 million will be recognised this year. Of course, Yongnam is also taking part in tenders this year and winning some of these potential projects would bump up revenue figures. Expectations are for project wins with total value of almost $300 million.

As long as nothing like what went wrong last year happen this year, I believe that Yongnam's numbers for 2014 couldn't get any worse. Guidance is for gross profit margins to normalise to 20% this year and even if Yongnam did not win a single contract this year, which is highly unlikely, they would still be able to deliver a similar or stronger EPS.

On 31 October, I said that, "With a 3Q loss, they might or might not pay a dividend for the year although a lower DPS should not be demanding. Without major CAPEX in the year, this is a possibility."

Yongnam declared a DPS of 0.6c which is higher than their EPS of 0.44c. This signals Yongnam's ability as well as determination to reward shareholders despite having had a tough year. I appreciate it and, to me, it also shows that Yongnam is likely to reward shareholders more generously when its numbers improve again in future. Will it happen? Very likely, it will.

Someone told me that with EPS of only 0.44c, if we value Yongnam at 8x earnings, its shares should be worth only 3.5c each. I told him that I am a generous person. So, I value Yongnam at 11x earnings and will buy from anyone who is willing to sell to me at 5c per share. Any takers?

See presentation slides: here.

Related posts:
1. Yongnam: Substantial shareholder increased stake.
2. Yongnam: Profit guidance 3Q 2013.


Solace said...

i am more generous, sell to me at 6cents or 7cents 1st. :)

AK you will be queuing behind at 5cents after i am done. hahaha lol

AK71 said...

I haven dig in into Yongnam SOFP and SOCI, but base on last year dip in profit, seems like most losses are one time losses. (87% decline). They don't always sell away their steel piles or provision for bad debt. If they do it again, I'll do a 200% short on their shares using CFD.

Assumption is if the losses are not recurring, take out all the one time and assume there is a decline in earning this year.

So, using your "old PE" at $0.03 base on 87% decline, adjust to a 20% decline (since they would bid for government project and lesser of private constructions). We know government projects are way less profitable as compared to private.

8X ratio = 0.03 / [Earning(1-0.87)] --to--> 10X = P / [Earning(1-0.2)]

Reason for 10X, constructions are not an easy company to review due to many branch out, but their earnings are by % of completion, and are earnings of past secured project. Which is actually highly predictable in terms of cash flow. And certainty commands a higher price. (Of course, anyone can use any number they want and value whichever they like, but if it is not truthful reflective, the valuation is as good as obsolete)

Additional reason for that 20% discount, labour supply has been a great challenge for all construction companies since they are labour intensive. And it is likely manpower cost will increase further for 2014 and 15, thereby operating expense.

Rev - op expense = Op profit

And w/out calculator it is ranging 18 to 25 cent. (I think, haha)
Of course, if we are buying, we aim for 18cent. If we got them, we get a dividend of 2.5%. Slightly below inflation rate.

**disclaimer: I have not look or analyze SOFP or SOCI of Yongnam, all numbers used are solely base on given in the blog**

Edwin Ng ZA
Performance Analyst at Citi Private Bank
(On Facebook)

AK71 said...

Hi Solace,

You so clever. Next time, I must know not to reveal everything in my blog. -.-"

Janice said...

Hi AK71, are you still holding on to Yong nam?

Will you add more in the correction?

AK71 said...

Hi Janice,

I am still a shareholder of Yongnam's. :)

Technically, there should be strong support at 22c. So, I am in no hurry to buy more. ;)

AK71 said...

Yongnam Engineering & Construction, the wholly-owned subsidiary of Yongnam Holdings, the structural steel contractor and specialist civil engineering solutions provider, says it has secured $54.3 million worth of subcontracts, involving more than 10,000 tonnes of structural steelwork.

In the first subcontract, Takenaka Corporation awarded Yongnam a subcontract for structural steelwork at the upcoming Changi International Airport Terminal 4. The scope of work involves the supply, fabrication, surface treatment, delivery and erection of structural steelworks of the roof structure, certain parts of the internal floors as well as the link bridges, canopies and other appendages of the new airport terminal. Yongnam is expected to commence site works in the third quarter of 2014 and the new airport terminal is expected to be completed in 2017.

For the second subcontract, Samsung C&T Corporation awarded Yongnam the structural steel subcontract in the redevelopment of the UIC Building along Shenton Way, Singapore. This project is a mixed development and comprises a new 23-storey Office Tower and a new 53-storey Residential Tower complete with a seven-storey podium and 2 Basements. Yongnam will supply, fabricate, surface-treat, deliver and erect the steel structure required in the construction of the development’s residential and office towers. The entire redevelopment is expected to be completed in 2017.

Source: The EDGE

AK71 said...

Expect construction activities to intensify in 2015. We maintain our view that construction activities will likely intensify towards 2015. Current pipeline projects contributing to construction activities in 2015 include Thomson Line, Downtown Line 2 & 3, Phase 4 of Pasir Panjang Terminal, LNG Terminal, Deep Tunnel Sewage System, M+S development projects at Ophir-Rochor and Marina One, Changi Airport development including Terminal 4.

Source: DBS Group Research.

AK71 said...

Yongnam Holdings:
SGD0.24 BUY (TP: SGD0.29) - DMG/OSK 17-April-14

We initiate coverage on Yongnam with BUY and a RNAV-based TP of SGD0.29 (a 20% upside). As a market leader in structural steelwork and specialist civil engineering, Yongnam is a proxy to the positive emerging trends in Singapore’s construction sector. Although its share price has taken a beating due to its earnings underperformance in FY13, we expect an operational recovery from 2H14F with improved margins. Its orderbook is at a healthy SGD340m.

While revenue will be smaller in FY14/15F, we expect earnings to increase to SGD26.8m (from FY13’s SGD5.5m), as gross margins will recover to 20% in FY15F (from FY13’s 10%).

Yongnam is poised to benefit from a strong wave of incoming infrastructure projects (estimated at SGD31bn-38bn in 2014), a trend of steel construction displacing reinforced concrete, and a new wave of national productivity drive that favours construction materials such as prefabricated steel.

Trading at discounts of 5% and 17% from FY14F book value and our RNAV/TP of SGD0.29 respectively. Yongnam’s current SGD0.24 share price suggests low earnings expectations for the company – the market is pricing in a potential loss in equity of SGD12.4m from FY13 levels.

We believe the market has overpriced the execution risks relating to Yongnam’s projects, as we think it would be unlikely for the company to incur annual losses in FY14F and FY15F. Yongnam’s smaller peers are trading at an average of 1.7x P/BV, compared with its 0.96x. The company is currently trading at a 11.4x FY15F P/E.

Unknown said...

Hi AK,

Yongnam's latest result looks bad, with big debts. Will this be a big concern?

AK71 said...

Hi Cindy,

As the name suggests, bad debt is bad. It is, however, good to recognise it and make provisions for it.

This is going to be a very difficult year by the looks of things. Many will be wondering if Yongnam could turn in a positive EPS or not for the full year.

I still feel that Yongnam will benefit from the higher spending on infrastructure in Singapore, being a leader in its field. Having said this, I will be keeping an eye on its results in the next two quarters.

Unknown said...

Ya, it seems like the successful bidding of Myanmar Airport construction might be its saving grace ... if it happens. I wonder what is taking Mynamar so long to decide.

Solace said...

Increase in gross debt and gearing. operation has been bringing in little positive FCF in 1H 2014.

hmmm, what would i do?

I think i will accumulate on weakness should it test 22 cents or kiss 21.5 to 21 cents. This is of course not good

Analyse, have a plan and stick to it. Don't panic

AK71 said...

Hi Cindy,

I will think of the Myanmar project as a bonus if it should happen. I won't think of it as a saving grace. ;p

I am more interested in the company's track record at securing contracts and how it could benefit from projects at home being the biggest in what it does here.

So, it is reasonable to assume that they will bag their fair share of contracts. There is a level of certainty here, if I may be so bold.

Do we feel that the experienced management will be able to deliver the goods? Do we feel that last year and this year are years of temporary weakness although rather bad ones?

Time will tell but Yongnam's track record is in their favour. :)

AK71 said...

Hi Solace,

Negative EPS is never nice to look at. If things do not improve significantly in 2H 2014, shareholders might not get any dividend too. Actually, I will be quite happy if they were to breakeven in FY2014.

I will look out for signs of improvement in 2H 2014 before deciding if I should add to my long position. :)

AK71 said...

Yongnam Holdings, the structural steel contractor and specialist civil engineering solutions provider, today reported a net loss of $5.3 million for the three months ended June 30, 2014 (2QFY2014). This came on the back of a 46.5% drop in revenue to $61.6 million.

Seow Soon Yong, Yongnam’s Chief Executive Officer explained: “Yongnam had enjoyed several years of record profits because of the Group’s involvement with a number of iconic projects in Singapore. Since FY2013, gross margins had declined, both because of the nature of the projects and increasing competitive pressure. Cost overruns on a few projects further eroded margins. However, as the outlook remains positive with several interesting prospective projects in the pipeline, we have decided to focus on winning high yield projects, most of which are open for bidding only in the second half of FY2014. The Group will maintain its resources in anticipation of winning more projects in the second half of FY2014.”

With the completion of the mega Marina Coastal Expressway (MCE) contracts at the end of FY2013, the Singapore Sports Hub at the end of 1QFY2014 and no new project secured in 2QFY2014, Group revenue dropped by 46.5% to $61.6 million, compared to $115.1 million in 2QFY2013.

Revenue for the Specialist Civil Engineering segment decreased by 33.4% year-on-year, from $44.7 million in 2QFY2013 to $29.7 million in 2QFY2014. Ongoing projects like the MRT Downtown Line 2, Downtown Line 3 and the Hong Kong MTR were the key contributors.

The Structural Steelwork segment recorded a similar year-on-year decrease of 54.9%, from $70.4 million in 2QFY2013 to $31.7 million in 2QFY2014. South Beach Development, National Art Gallery, Market Street and Marina One were the key contributors to this segment in the quarter under review.

As at end June, Yongnam has an order book of $275 million.


Unknown said...

Hi AK,

Does your crystal ball say anything about adding more Yongnam, with the shares falling below 20 cts?

AK71 said...

Hi Cindy,

Although some added to their long positions at 22c, 21c and 20c, my bowling ball whispered that it could go lower. Technically, a stronger support is at 18c. I could possibly add some if price should approach 18c and if the support should be tested.

I still retain 20% of my original long position and, this, I am quite comfortable holding although it is now in the red.

AK71 said...

Yongnam Holdings’ Malaysian unit has agreed to sell its factory at Nusajaya, Johor, to Axis Real Estate Investment Trust before leasing it back from the REIT.

Axis will pay RM153.5 million ($60.1 million) for the purchase. The property has been valued at RM167.5 million.

Yongnam is expected to make a net book value gain of $9.5 million.

Upon the transaction, Yongnam Malaysia will remain as the tenant of the property for a term of 15 years.

The sale proceeds are expected to be redeployed into the working capital for the group’s projects.


Ryan said...

I've been watching Yongnam with interest for some time, and I'm getting increasingly worried about the potential cash flow issues they may be facing.

Yongnam has had two consecutive quarters of losses and negative cash flow, with cash levels falling to just $11 million. Meanwhile, debt payable in one year or less, or on demand has been steadily growing, from $59 million in Dec 13 to $68 million in Mar 14 to $79 million in Jun 14. That's 33% increase in short term debt in half a year!

When I first saw the news today morning of the sales & leaseback deal, I was pleased - this will really help with the cashflow issue. But after a quick analysis, it seems to be quite a disappointing (or even distressed) sale. Consider that Yongnam is contractually bounded to lease the property for 15 years, and yet had to sell it at a 7.6% initial yield (the seems to be a built-in upward revision as well) - I feel that they could probably have found a better deal elsewhere. I certainly would have bought it from Yongnam if they were to offer it to me at that price :P

The next couple of quarterly reports should shed more light on the situation at Yongnam. I'll be paying close attention to their cashflow, and see what happens to the cash from this sale. Hopefully it will serve a greater purpose than to merely plug a leaky ship.

AK71 said...

Hi Ryan,

Thanks for the insightful comment. Much appreciated.

Yongnam has the potential to do better, of course, if they replenish their order book fast. I am looking forward to some order wins soon.

AK71 said...

"Yongnam Holdings can afford to pay special dividends to shareholders following a move to sell its plant in Johor to Malaysia-listed Axis Real Estate Investment Trust ( Financial Dashboard) for about $60 million, says DBS Vickers.

"The steel fabricator said yesterday it would sell the property, which has a net book value of $24.5 million, and lease it back for 15 years.

"Assuming the sale was completed last year, it would have boosted Yongnam ( Financial Dashboard)’s FY2013 earnings per share to 3.13 cents from 0.44 cents.

"Its net tangible assets per share would have risen to 27.66 cents from 24.98 cents."


Solace said...

An update on order Book:


- Contracts awarded for the Marina South Station and Tunnels as well as
Napier Station in Singapore and for a temporary steel bridge in Hong

Unknown said...

Yongnam did it! It won a US$1.4 billion ($1.78 billion) contract to build the airport in Myanmar’s Yangon. The wait was nerve-wrecking ..hehehe

AK71 said...

Hi Cindy,

Thanks for the update. This is a huge contract. Very likely, we will see a flurry of re-rating upwards by the research houses. :)

Unknown said...

Ak, what do you make of the latest quarter report. Will you reduce exposure or continue to add at lower prices, cos I think the price will fall again next year. M hoping for a better result actually ...

Yongnam: Reports Loss Of S$8.4 Million For 3QFY2014.
14 Nov 2014 17:59

Yongnam Holdings Limited reported a net loss of S$8.4 million on a 50.7% decrease in revenue to S$47.3 million for the three months ended September 30, 2014. Net asset value per share declined by 1.85 Singapore cents, from 24.98 Singapore cents as at December 31, 2013 to 23.13 Singapore cents as at September 30, 2014. The Group is currently in active pursuit of S$964 million worth of new infrastructural and commercial projects in Singapore, Hong Kong, Malaysia and the Middle East.

AK71 said...

Hi Cindy,

Investing in Yongnam now is to believe that earnings will improve in the long run and that the current weakness is temporary.

If we believe that Yongnam's poor results are here to stay because they are due to something more enduring, then, we should sell.

Personally, I still retain a long position that is about 20% the size of my original investment in Yongnam.

Taking into consideration capital gains and dividends received over the last two years, my current position is probably free of cost and I am quite comfortable holding on and waiting for the company to deliver better results in the future.

wx said...

Yongnam reach 17cents already. Do you see any value at this price? Seems like all the euphoria for the Myanmar airport contract has fizzled off in just a few months!

AK71 said...

Hi Wei Xiong,

Well, the Myanmar Airport project although big is a long term thing. We are unlikely to see any near term impact on earnings. So, I am not surprised by the weakness as Yongnam's recent earnings have been disappointing.

However, they have won several contracts apart from the mega airport project. So, I suspect that Mr. Market could be overly pessimistic about Yongnam's future.

I actually put in a buy order just now as I would like to start accumulating at the current price level and lower. :)

wx said...

Nibbled some at $0.168. :)

AK71 said...

Hi Wei Xiong,

I am still in the BUY queue. -.-"

Unknown said...


Can share a TA post on Yongnam? It'll help those to roughly know a good entry price. Tks much!

AK71 said...

Hi Cindy,

Longer term Fibo lines are at 16.3c, 15.6c and 15c. These are all golden ratios.

Of course, there is no saying whether these levels would actually be tested. ;)

wx said...

16.3cents soon! :D

wx said...

"Net asset value per share declined by 1.33 Singapore cents, from 25.01 Singapore cents as at 31 December 2013 to 23.68 Singapore cents as at 31 December 2014. "

AK71 said...

Hi Wei Xiong,

Thanks for the update. I am just putting in the finishing touches to a new blog post on Yongnam. :)

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