Tiong Seng Holdings - DBS Research 2017-12-05: Beneficiary Of Residential Projects

Tiong Seng Holdings - DBS Vickers 2017-12-05: Beneficiary Of Residential Projects TIONG SENG HOLDINGS LIMITED BFI.SI

Tiong Seng Holdings - Beneficiary Of Residential Projects

  • Tiong Seng Holdings - One of the leading construction companies in Singapore.
  • Beneficiary of government’s drive to improve productivity; specialises in concrete fabrication and has 90,000m 3 /year of capacity.
  • Growth led by both property development and construction segments.
  • Fair value of S$0.45 based on 6.6x average FY18F PE and 0.6x book value.



THE BUSINESS


Construction and real estate developer in Singapore and China.

  • Tiong Seng is a construction and civil engineering company in Singapore, and a niche real estate developer in China.

Recovery in property market may boost more projects going forward. 

  • Tiong Seng has a strong track record in construction of residential projects. With Singapore’s private residential property market turning around and en-bloc sales picking up, Tiong Seng is well placed to capitalise on winning more projects from potential tenders from developers.

Strong prefab capabilities. 

  • Tiong Seng’s also specialises in the fabrication of concrete and has 90,000m 3 of annual production capacity with plants Singapore and Johor to facilitate production and delivery of precast building technology to construction projects. 
  • As a prefab solutions provider, we see Tiong Seng as a key beneficiary of the government’s initiative to boost productivity in the construction sector over the next few years.


THE STOCK


Fair value of S$0.45. 

  • Our fair value of Tiong Seng is S$0.45 pegged to 6.6x FY18F PE and 0.6x book value.

Competition, lower tender prices and slow pace of projects are key earnings risks. 

  • Competition and the pace of construction projects is key to a recovery in the construction sector. 
  • While projects are available in the market, keen competition in a slow project rollout environment will lead to lower tender prices and lower margins. These will negatively affect project sizes and revenue, as well as earnings.


REVENUE DRIVERS 


Four key segments. 

  • Construction – Tiong Seng acts as a main contractor in private and public construction and civil engineering projects, providing services mainly to property developers in both sectors. 
  • Property development – Tiong Seng develops and sells properties mainly in China. Projects include The Equinox in Dagang, Tranquility Residences in Xushuguan Development Zone Suzhou, Zizhulin in Tianjin, Eco-City in Tianjin, and 16 Balmoral Road in Singapore.
  • Rental – Rental sales is a small segment relating to rental of investment properties and plant and machinery. 
  • Sales of goods – Tiong Seng sells construction patented Cobiax technology, a green technology that reduces unnecessary deadweight in concrete slabs by positioning hollow void formers within the slabs.

Property development. 

  • Tiong Seng has ongoing initiative to acquire landbank and develop properties. Its 60% owned investment TSky Development Pte Ltd (remaining 40% is held by Ocean Sky International Limited) recently formed a 70:20:10 Joint venture with Progen Industrial Pte Ltd (20%) and Seacare Property Development Pte Ltd (10%) to acquire 17 Balmoral Road in district 10 for a total consideration of S$80.5m for 38,943 sqft of land bank with gross plot ratio of 1.6 (equivalent to S$1,292.0 psf ppr). The consortium intends to redevelop this site into a 12-storey, 80-unit residential project for launch tentatively in 2H2018 and TOP in 2H2020. 
  • Tiong Seng also has approximately S$121.8m of unrecognised gross development value from its China projects as at end-3Q17 - Equinox 103 units (18,379 sqm) and Tranquility Residences 71 units (22,738 sqm).

One of the largest prefab solution providers in Singapore. 

  • Tiong Seng has an annual prefab capacity of 90,000m3 and is one of the key providers of prefab solutions in Singapore. Its Singapore facility in Tuas is operating close to full capacity, largely to fulfill orders for third party customers. 
  • The Singapore government has rolled out plans to improve productivity in the construction sector since 2010. New tender criteria encourage contractors to use construction technologies such as Prefabricated Pre-finished Volumetric Construction (PPVC) methods to raise productivity. Tiong Seng will be a key beneficiary of this trend as one of the largest prefab solutions providers in Singapore.


GROWTH PROSPECTS 


Strong pipeline of public sector projects available for tender. 

  • In the light of subdued private sector construction demand, the Singapore government has communicated plans to push out a strong pipeline of large-scale infrastructure projects over the next few years. On top of S$700m worth of contracts announced during the Budget in February, the government shared in September 2017 that it will also bring forward S$700m worth of public amenity projects to 2017 and 2018.
  • Apart from the North-South Highway, large-scale projects potentially up for tender include the Land Transport Authority (LTA)’s Jurong Region Line, Cross Island Line, and Changi Airport Terminal 5.

Recovering Singapore property market positive for private sector construction and new projects.

  • Singapore’s 3Q17 private residential price index turned up after 15 consecutive quarters of decline. The property market is expected to recover gradually in the next 12 months with more transactions driven by all segments of the market. Along with recent en-bloc activities in the market Tiong Seng could benefit from the upturn in the upcoming residential construction projects in the next few years.

Construction order book of S$637m till 2020. 

  • Tiong Seng’s order book was S$637m as of 3Q17 with projects extending till 2020. It has currently close to 10 ongoing construction projects in Singapore from residential to industrial, public and civil engineering contracts. 
  • Key contracts are Executive Condominium at Choa Chu Kang Grove (S$276m), Great World City Station (S$316m), and JTC @ Tuas (S$277.3m).


MANAGEMENT & STRATEGY 


Experienced management team. 

  • Tiong Seng is helmed by a team of industry veterans. Its key management team includes Mr. Pek Lian Guan (Executive Director and CEO), and Mr. Pay Sim Tee (Executive Director). Mr Pek Lian Guan and Mr Pay Sim Tee have 20 and more than 30 years of experience in the local construction industry respectively.

Three-pronged growth strategy.

  • Tiong Seng has a three-pronged growth strategy in Construction, Real Estate and Civil Engineering. 
  • The real estate business although lumpy and determined by development project flows, delivers higher ROE, while construction contributes the bulk of revenue and earnings. It has established a new civil engineering arm to compete for more civil projects including the upcoming North-South highway.

Management’s interest aligned with shareholders'.

  • Management’s interest is well aligned with shareholders' given that the co-founding Peck and Pek family collectively own close to 68% of Tiong Seng. 
  • The group does not have a fixed dividend policy but typically pays out > 20% of profits as dividends.


VALUATIONS 


Currently trading near average valuations…. 

  • The stock currently trades near the average of its 5-year PB multiple of 0.72x. However, losses incurred as a result of write down of property investments in FY14 distorts the stock’s historical PE chart.

Fair value based on average of PE and book value. 

  • Our fair value for the stock is derived from average of valuations using PE and book value, which takes into account both growth and asset values. Our PE-based valuation is S$0.41, pegged to 6.6x FY18F EPS, which is +2SD PE valuation since 2016. Our PB-based valuation is S$0.49 pegged 0.6x PB, near its historical average of 0.7x. The average of the two valuations work out to a fair value of S$0.45 per share. 
  • Potential upside is >15% including dividends.

Low net debt. 

  • Net debt is low and it is in near cash position as at end-3Q17. It had a 1-for-5 rights share issue in 2014, raising net proceeds of S$27.4m which were mainly used for loan repayment and expanding property and precast business. It also issued S$75m, 3.5 years 4.75% notes due January 2018 in 2014.

Tightly held shareholding. 

  • Shares are tightly held as free float is c.22%. The co-founding families of Peck and Pek have a majority control of 68% over Tiong Seng.



Return *: 2 
Risk: Moderate 
Potential Target 12-mth* :12-Month S$0.45 




Alfie YEO DBS Vickers | http://www.dbsvickers.com/ 2017-12-05
DBS Vickers SGX Stock Analyst Report NOT RATED Maintain NOT RATED 0.45 Same 0.45

*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report.


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