SHS Holdings Ltd - CGS-CIMB Research 2019-01-29: Eyeing New Zealand For Prefab Growth

SHS HOLDINGS LTD. (SGX:566) | SGinvestors.io SHS HOLDINGS LTD. (SGX:566)

SHS Holdings Ltd - Eyeing New Zealand For Prefab Growth

  • SHS is supplying prefabricated modules for Cosa Hotel, New Zealand’s first modular-built hotel, and anticipates rising demand for modular projects.
  • Management expects its new 36,000 sq m prefab plant to be up and running by year-end, adding to its existing 8,000 sq m factory.
  • The stock is now trading at 0.8x FY18F P/BV, 9.2x FY19F P/E based on Bloomberg consensus estimates.

Second prefab plant (4x larger than the first) to start by year-end

  • We visited TLC Modular’s (60%-owned subsidiary of SHS HOLDINGS LTD. (SGX:566)) prefabrication (prefab) facility in Vietnam, located on the waterfront in Vung Tau City.
  • TLC Modular’s key capabilities are modular construction or pre-finished volumetric construction (PPVC), which involves the design and building of factory-produced, pre-engineered building units that are delivered and assembled on-site. Its existing factory measures 8,000 sq m and management expects a new 36,000 sq m factory to be up and running by year-end.

Anticipates growing demand for modular projects in New Zealand

  • Amid the housing crisis in New Zealand – figures released by the nation’s Ministry of Business, Innovation and Employment (MBIE) revealed a housing shortfall of 71,000 dwellings in 2017 – SHS believes it can tap this opportunity by exporting its PPVC modules to the New Zealand market.
  • Management commented that SHS is particularly suited to the New Zealand market, given the company’s modular construction capabilities, lower cost base and ability to price itself below rival firms.

Projects in hand

  • SHS is undertaking the modular construction of Cosa Hotel (5-storey, 88-room hotel) in New Zealand, which it expects to deliver in 1H19F. In 2018, the group was awarded two modular construction contracts worth NZ$30m (S$28m) to build a serviced apartment comprising 217 modules and a hotel consisting of 20 modular units in the country.
  • Refer to the PDF report attached for more details on cost structure and margins of prefab construction and its competitive landscape. 

Diversified businesses

  • Apart from its modular construction business, SHS is also involved in the following business segments:
    1. structural steel engineering (together with prefab modular business forms 68% of FY17 revenue),
    2. corrosion prevention services (26%) for the oil and gas industry in Singapore,
    3. solar energy (3%), comprising engineering and construction of solar power projects in Singapore and Bangladesh, and
    4. other (3%)

Trading at 0.8x FY18F P/BV, 9x FY19F P/E

  • SHS is currently trading at 9.2x FY19F P/E and 0.8x FY18F P/BV (c.30% below its long-term average of 1.1x P/BV), based on Bloomberg consensus estimates. The group’s 9MFY18 results showed net losses.
  • As at end-Sep 2018, SHS was in a S$16m net cash position.

Risks and concerns

Uncertainty over capacity and construction challenges

  • According to a Rider Levett Bucknall (RLB) report titled “New Zealand Trends in Property and Construction Q4 2018” released on 5 Nov 2018, construction demand is likely to remain robust as there is strong demand for residential housing in New Zealand. One key concern raised in the report is whether there is enough capacity to realise the New Zealand government’s KiwiBuild target of building 100,000 dwellings over the next decade.
  • Challenges faced by the New Zealand construction sector include labour shortages, low operating margins and uncertainty of cash flows, particularly for smaller and mid-sized firms.

Possible dilution from warrants

  • SHS issued 304m warrants in Dec 2014 at an exercise price of S$0.20. The warrants are due to expire on 17 Dec 2019. As at end-Sep 2018, unissued shares under warrants numbered about 218.6m, accounting for c.32% of the 685m outstanding share base.

Colin TAN CGS-CIMB Research | https://research.itradecimb.com/ 2019-01-29
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998 SAME 99998