Yongnam Holdings - CGS-CIMB Research 2019-02-28: Looking At A Slower Recovery


Yongnam Holdings - Looking At A Slower Recovery

  • Disappoints with wider-than-expected FY18 net loss. Yongnam's order book recovered from multi-year low, ending at S$366m as at end-Dec 18.
  • With 45-50% of order book (c.S$172m) slated for completion this year, we now anticipate a slower recovery with narrowing losses in FY19F.
  • Maintain ADD with a lower Target Price of S$0.33 as we expect losses to narrow in FY19F and a possible turnaround to profits in FY20F.

FY18 losses wider than expected

  • YONGNAM HOLDINGS LIMITED (SGX:AXB) reported an FY18 net loss of S$51m (accounted for 144% of our forecast) mainly due to a dearth of major projects executed in the year.
  • FY18 revenue rose 47% y-o-y to S$161m.
  • Strut assets were under-utilised at 25%, resulting in overhead costs of c.S$30m that were not covered during the year.

Positives: order book recovers from multi-year low to $366m

  • As at end-Dec 18, Yongnam's order book stood at S$366m, of which 45% will involve N103 North-South Corridor (NSC) works in a main contractor role, 24% in specialist civil engineering while the remaining 31% in steelworks and other works. About 45-50% of the order book (c.S$172m) is slated for completion within FY19F.
  • We estimate Yongnam would need to recognise over S$300m in revenue to return to profits.

Anticipating further strut works from NSC to be won this year

  • As part of the JV that has secured the N103 contract, we think Yongnam would likely undertake strutting works (worth c.S$50m) that has yet to be awarded.
  • With all 11 NSC contracts having been awarded to main contractors in Nov 17-Jan 19, Yongnam believes it could potentially win half of the available strut works for NSC as a sub-contractor in FY19F, given that it owns 210k tonnes of strut assets – the largest in Singapore.

Long-term strategy is to undertake projects as a main contractor

  • Management recognised the challenges such as trending lower margins from projects undertaken as a sub-contractor, thus the long-term strategy is to build up capabilities towards a main contractor.
  • We believe it would team up with established contractors (such as the JV with Leighton for N103) to bid for major upcoming infrastructure projects – Jurong Regional Line, Changi Terminal 5 and Cross Island Line – ahead. Design-and-build is another segment that the group is looking at to further build up its competency.

Maintain ADD with a lower Target Price of S$0.33

  • With the worst now over in our view, we anticipate losses to start to narrow this year and look to a possible earnings recovery in FY20F. Yongnam is currently trading at 0.4x P/BV, 1.s.d. below its 10-year average of 0.9x.
  • We introduce our FY21F forecasts and retain our ADD call with a lower Target Price of S$0.33, now pegged to 0.7x (previously 0.8x). FY19F P/BV (20% discount to its long-term average of 0.9x).
  • Major contact wins would be the potential upside catalysts.
  • Key risks include project delays.

Colin TAN CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-02-28
SGX Stock Analyst Report ADD MAINTAIN ADD 0.33 DOWN 0.400