Yongnam Holdings - CGS-CIMB Research 2018-08-14: Not Out Of The Woods Yet

YONGNAM HOLDINGS LIMITED SGX:AXB

Yongnam Holdings - Not Out Of The Woods Yet

Yongnam’s results were below our expectations. The 1H18 net loss of S$13m was mainly due to the low level of strutting and fabrication work.
Order book stood at S$273m as at end-Jun 18, a significant uplift from the S$142m in orders at end-Mar after winning the N103 contract for North-South Corridor.

It is actively pursuing S$1.4bn worth of projects in Singapore, Hong Kong, Australia, and other developing countries in Asia.
We change our FY18F EPS to LPS and cut our FY19-20F EPS by 3-43% in view of delays in getting strut works from North-South Corridor and Melbourne Metro projects.
Maintain ADD with a reduced Target Price of S$0.45, based on 0.8x FY19F P/BV.

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Yongnam reported a 2Q18 net loss of S$8.2m on the back of a 43% y-o-y drop in revenue to S$45.5m, below our expectations. This was mainly due to the low level of strutting and fabrication work amid a dearth of major projects, leading to overhead costs not being fully absorbed.
Projects that mainly contributed to revenue for the quarter include Outram Community Hospital, Thomson-East Coast MRT and Hong Kong MTR.

Only four NSC packages have been awarded todate and we understand strut works for the N106 and N107 contracts (won by Samsung C&T) have already been given out.
With NSC requiring an est. 200k tonnes of struts in total and Yongnam having the largest struts capacity that exceeds the combined capacity of its major competitors ( < 100k tonnes), we think Yongnam could still win strut orders (c.S$200 worth by our estimates) from other NSC contracts. This is in addition to the N103 contract it secured in May 18.

Despite the prolonged delay in getting the Melbourne Metro project, management revealed that the project remains in the pipeline and is confident of getting it after finalising the necessary documentation. If awarded, this could add S$50m worth of strut works to its order book.

In view of the delays in getting more projects this year and misses from getting subcon works for N106 and N107 contracts, we project Yongnam would only turn profitable in FY19F. As such, we lower our FY19-20F EPS by 3-43%.
The order book stood at S$273m as at end-Jun 18 and Yongnam is actively pursuing $1.4bn worth of projects in Singapore, Hong Kong, Australia and other developing nations in Asia.

Although we have admittedly been overly optimistic on the timing of its turnaround, we nonetheless remain positive that better times lie ahead for Yongnam in the next 12 months.
We maintain ADD with a view of a robust recovery in FY19F, and a lower Target Price of S$0.45 pegged to 0.8x FY19F P/BV (10% discount to its long-term average of 0.9x).
Key downside risks include project delays.
Re-rating catalysts include major contract win announcements.

Colin TAN CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-14

SGX Stock Analyst Report ADD Maintain ADD 0.45 Down 0.560