SHS Holdings Ltd - Phillip Securities 2018-05-25: Exporting Construction Technology

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SHS HOLDINGS LTD. SGX:566

SHS Holdings Ltd - Exporting Construction Technology

• Expect a surge in modular business sourced from New Zealand.
• Upcoming recurring revenue from a solar project in Bangladesh.
• Recovery in marine and construction sector to support legacy businesses.
• Initiate coverage with BUY rating with Target Price of S$0.29, based on FY19e EPS of 2.9 SCents and 10x PE multiple.

BACKGROUND

• SHS Holdings Ltd (SGX:566) currently derives revenue from Corrosion Prevention, Structural Steel and Facade Engineering. However, future growth will mainly come from its two new business segments, i.e. Solar Energy and Modular Construction.
  • Structural Steel Engineering engages in the design, engineering, and construction of steel and aluminium.
  • The Corrosion Prevention segment is involved in the coating and blasting of raw materials, mainly steel structures, steel plates and fabricated modules.
  • Solar Energy is operated under its subsidiary Sinenergy, which engages in the engineering, procurement and construction of solar power projects. It currently runs projects in Singapore and Bangladesh, both involved in the sale of solar electricity.
  • Modular construction is operated under its Vietnam based subsidiary, TLC Modular. It offers prefabricated construction solutions in the form of prefabricated prefinished volumetric construction (PPVC) and prefabricated bathroom unit (PBU).

The Four Business Segments

1. MODULAR CONSTRUCTION

• TLC Modular is located in Ho Chi Minh, Vietnam. 
• Modular construction is a construction process where a building is constructed 90% off-site in a controlled factory environment. These units are then transported on-site to be pieced together into a building. Only 10% of work is required on-site. Trucks carrying the module to the site can easily undertake transportation. Mechanical, electrical and plumbing work can be completed off-site such as air conditioning, internal wirings, lights and finished floors. 
• TLC Modular’s 2 key products are steel PBU (prefabricated bathroom unit) and PPVC (prefabricated prefinished volumetric construction). Such modules can be used in the construction of residential houses, apartment, hotels, portable accommodation, cabins, commercial and office construction. There are 2 broad types of PPVC:
  1. Reinforced Concrete PPVC
  2. Steel PPVC
• The group’s focus is on the construction of steel PPVC. Steel PPVC is suitable for export as it is lighter compared to reinforced concrete PPVC, thereby lowering transportation costs. 
• Capacity: The current factory has 5,000 sqm that is used for PPVC construction. Production capacity for the factory is at 480 PPVC units. In anticipation of an increase demand, the group has started construction of a new 28,000 sqm factory with a capacity of 1,500 units (or c.3x its current capacity). The new factory is slated to commence operations by 2Q19. Total production capacity will add up to 1,980 PPVC units.
• Projects: TLC has recently secured two projects in New Zealand, adding S$28m into its order book.
  • The first project is to design and build a serviced apartment for Global Yellow Pages in Queenstown which is made up of 217 PPVC units. The completion of the construction is estimated to be in FY19. 
  • The second project is for the first phase of Godley Hotel’s refurbishment in Tekapo which consist of 20 PPVC units. The targeted completion of this project is by FY18. TLC is also currently running the Cosa Hotel project in Christchurch, which is estimated to complete in 2H18. TLC manages projects in Singapore and Western Australia as well.

2. STRUCTURAL STEEL & FACADE (SSF)

• Structural Steel & Facade (SSF) is the group’s current largest revenue contributor at 68% of FY17 group revenue.
• SSF is primarily engaged in the business of designing, engineering and construction of steel, aluminium and glass structures. SSF’s work processes include evaluating materials, construction methods, costs, risks and sustainability.
• SSF portfolio of projects includes the SMU Law library, 11-km of high-specification barrier system at the Singapore Formula 1 Grand Prix, Singapore Sports Hub's pedestrian bridge, the installation of artwork canopies at Gardens by the Bay, canopies at Westgate shopping mall, and industrial structures at Hyflux's desalination plant and Yeh Brothers Woodworks factory in Malaysia.
• Major competitors in Singapore include Yongnam and TTJ Holdings.

3. CORROSION PREVENTION (CP)

• The Corrosion Prevention (CP) segment services the marine, oil and gas, construction and infrastructure industries. Corrosion prevention lengthens the lifespan of metal structures by repairing and protecting damaged metal surface in metal structures. This is primarily done by using different blasting methods to remove damaged paint from the structure and applying a fresh coat of paint.
• CP offers various types of products and services ranging from plant operations, tank coating & on-site grit blasting, trading. Plant operations involve blasting and coating of raw materials namely steel plates and steel structures. Tank coating is a process of controlled grit blasting and paint coating for internal surfaces of chemical tankers and floating, production, storage and offload vessels. The control of humidity during tank coating is crucial in preventing oxidation of metallic surfaces between the time the surface is blasted and when the first protective coat of paint is applied.
• On-site grit blasting and coating services is offered when the metal structures are too large to be brought to CP facilities. As such, the group has an arsenal of mobile blasting equipment to cater for the job. The trading division designs, supplies and distributes CP systems and machinery.

4. SOLAR ENERGY (SE)

• The Solar Energy (SE) segment is operated under its subsidiary Sinenegry. It engages in the engineering, procurement and construction (EPC) of solar power projects. It currently runs projects in Singapore and Bangladesh, both involved in the sale of solar electricity. The company bears capital expenditure costs in these projects.
• In Singapore, Sinenergy is an EPC company that runs projects in both commercial and residential areas. In 2016, Sinenegry completed a 4MW grid-tiered solar photovoltaic system on the rooftop of SATS Airfreight Terminals 5 and 6 at Singapore Changi Airport. The sale of electricity has since started and will be ongoing for a total of 20 years. Sinenergy has a portfolio of residential projects in many parts of Singapore such as Springleaf, Wak Hassan and Woodlands Terrace.
• In Bangladesh, Sinenergy has secured a 50 MW solar farm project with the Bangladesh development board to provide 20 years of electricity at US$0.17/kWh. We expect construction to be completed in FY19. We expect the project will generate yearly revenue and earnings of S$14mn and S$4mn respectively. We factored in 1% decline of operating efficiency because of required maintenance, this is standard across the industry.

The New Zealand Opportunity for Modular Business

• We expect New Zealand housing market to be the primary growth driver for SHS modular business. 
• The housing shortage in New Zealand can best be resolved through modular construction methods. SHS has already made progress through the construction of Cosa Hotel and Ramada Encore Hotel in Christchurch New Zealand. We look forward to more projects in the pipeline.
• New Zealand is experiencing a huge deficit in housing, placing it as the worst in homelessness in the OECD (The Organisation for Economic Cooperation and Development). 
• Demand for new homes is around 18,000 p.a. whilst supply stands at only 10,000. There is an estimated cumulative shortfall of 44,738. The reason for the shortfall in housing is due to:
  1. Halt in construction and slow pick up of construction activities after the global financial crisis in 2008. Auckland, the largest urban area in New Zealand, suffered the most from the shortfall. If Auckland were to build houses at the same rate as the rest of the country, it would need to build approximately 50,000 dwellings and would require nearly 9,000 additional construction workers.
  2. Shortage of manual labour is also another factor contributing to the shortfall, which in turn raises the costs of labour.
• To make matters worse, Auckland’s population increased at an alarming rate, with a net gain of 120,000 migrants in the past five years. Population increased more in Auckland than the rest of New Zealand combined, but only half as many new dwelling permits were issued in Auckland. Real estate prices increased by more than 200% between 1992 and 2016.
• To address the shortfall, the government is looking to aggressively launch more public homes with the support of the private sector. In 2017, the private sector has built 8,000 homes a year in Auckland. 
• The Ministry of Social Development (MSD) has plans to add more than 3,500 homes to Auckland’s public housing over the next two years and 72,000 homes by June 2020 for the whole country. This equates to 1,777 homes per year in Auckland. This creates a surge in demand for modular construction in New Zealand as PPVC offers the speed required to reach the target set by MSD.

Understanding the value SHS can provide:

1. Speed: Because modular construction can occur concurrently with the site and foundation works, projects can be completed up to 40% faster than traditional construction. Since 90% of the construction is completed inside the factory this mitigates risks of weather delays, which is largely prevalent in New Zealand. Furthermore, due to the repetitive nature of modular construction, projects can be completed with greater level of efficiency and quality.
2. Lower overall cost: Labour costs in New Zealand averages to US$20.14 an hour, as compared to Vietnam’s US$7.25. There will be significant cost savings since 90% of the prefabricated work is done in Vietnam and then shipped over to New Zealand. Shipment cost will be relatively cheaper as TLC modular constructs the lighter steel PPVC instead of the heavier concrete PPVC. These factors allow SHS’s PPVC products to be priced more competitively.
3. Better structural integrity (Quality): Timber is the raw material normally used for residential construction in New Zealand. PPVC products offer better structural integrity as compared to the conventional way of construction in New Zealand.

INVESTMENT MERITS

Robust modular business boosted by strong demand in New Zealand.

• There is a huge shortage of housing in New Zealand. Demand for new houses is almost 18,000 per year while supply is only 10,000. Since 2009 there has been an estimated cumulative shortfall amounted to 44,738. This gives TLC Modular the opportunity to penetrate the market by exporting PPVC to New Zealand, because of the speed and cost reduction it is able to offer to developers alongside with the flexibility and efficiency offered in the nature of PPVC construction. 
• We believe TLC Modular is building up a track record of reliability and experience in New Zealand.

Recurring revenue from solar projects.

• The group has secured a solar farm project under its subsidiary Sinenergy with the Bangladesh development board, to provide 20 years of electricity. The 50 MW project was designed, constructed, financed, owned and operated by Sinenergy. 
• The project will generate yearly forecasted revenue and earnings of S$14mn and S$4mn respectively to the group.

Recovery of construction and oil & gas sector will contribute recovery of SHS core revenues.

• We have a rebound in overall construction contracts awarded in Singapore. This will be supportive for the structural steel business. In addition, the rise of oil prices has resulted in increased activity in the oil and gas sector. 
• We expect both businesses to enjoy a turnaround in revenues and profitability.

VALUATION

• We initiate coverage on SHS Holdings with a BUY rating and a target price of S$0.29. We are pegging SHS to other construction companies with prefabricated and structural steel business in Singapore.
• Our target price is based on 10X FY19e PE. We gave a 10% discount on SHS to its peers’ average of 11.2x as we take a more conservative approach in SHS’s valuation.

Paul Chew Phillip Securities | Alvin Chia Phillip Securities | https://www.stocksbnb.com/ 2018-05-25

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