Hock Lian Seng: DPS of 1.8c.

Hock Lian Seng's strong balance sheet, cash flow as well as high gross profit margin attracted me. Even if it is not a good investment for growth, I believe that it is a good investment for income with its record of paying out meaningful dividends.

Hock Lian Seng reported a gross profit margin of 40% on the back of lower revenue but higher gross profit. NAV per share improved from 24.9c to 27.8c. EPS reduced slightly from 4.9c to 4.7c, year on year.

A DPS of 1.8c has been declared. This means a payout ratio of 38.3% and a dividend yield of 6.67% based on the price of 27c a share.

Realistically, Hock Lian Seng will face headwinds in future and the management has said that:

The Group will continue to participate selectively in the some of the upcoming infrastructure projects tenders called by the Singapore Government. However, the Group is expected to face stiff competition from large foreign contractors, higher construction costs and a shortage of foreign workers.

So, although there is reason to believe that Hock Lian Seng will do reasonably well based on past track record, the landscape has definitely become more challenging.

Its exposure to property development could also be ill timed:

On the property development front, the Singapore Government has implemented property cooling measures to both the residential and industrial property market. The Group believes that the measures would create a stable and sustainable property market in Singapore.

The construction of the two industrial property developments are expected to be completed by early 2015. The joint venture residential project at Dairy Farm Road was launched in September 2013.

Having said this, now, with a PE ratio of 5.75x and trading at a slight discount to NAV, the stock does not seem expensive.

See: Full year results.

Related posts:
1. Hock Lian Seng: Buying on weakness.
2. Hock Lian Seng: Dividend 1.8c per share.

Yongnam: DPS of 0.6c.

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.