Yongnam Holdings - CGS-CIMB Research 2020-04-01: Not Out Of The Woods Yet


Yongnam Holdings - Not Out Of The Woods Yet

  • With the commencement of more strutting projects, we expect Yongnam (SGX:AXB)’s losses to narrow further in 1H20F, in anticipation of a breakeven in 2H20F.
  • However, Yongnam’s ICR is weak due to low profitability. Should its project execution be delayed materially, we see potential stress on cash flow.

Orderbook at a 5-year high

  • As at end-Dec 19, Yongnam's orderbook stood at S$405m, of which 35% involves the N103 North-South Corridor (NSC) works in a main contractor role, some 49% in specialist civil engineering, while the remaining 16% in steelworks and other works. About 40% of the orderbook (c.S$160m) is slated for completion within FY20F.
  • Management remains optimistic of further order wins in 2020F with the rollout of more transport infrastructure projects in Singapore, including NSC, Jurong Regional Line, Cross Island Line and Changi East development.

Losses to narrow in FY20F

  • Revenue recognition in FY19 was low as projects, including NSC and Changi T5, were still in the early rollout phase.
  • Yongnam’s strut utilisation rate remained low at c.20% in 4Q19. With the commencement of more strutting projects on hand, including NSC (total of 4 contracts) and Changi East (2 contracts), we believe Yongnam’s strut utilisation rate can return to a healthier level of c.35% in 2020F, allowing the company to better absorb overhead costs.
  • Yongnam also came out leaner post its organisational restructuring in 4Q19; management estimates c.S$8m cost savings per annum. We anticipate losses to narrow further in 1H20F, and look towards Yongnam achieving breakeven in 2H20F.

Look out for Yongnam’s weak interest coverage ratio (ICR)

  • Yongnam’s outstanding loans at end Dec-19 consisted of short-term borrowings (32.9%), long-term borrowings (57.3%) and convertible bonds (9.8%, due May 2021). Yongnam reported a loss of S$47.0m at the EBIT level in FY19, while its operating cash flow to interest coverage ratio in FY19 was 2.4x.
  • Management said that its construction activities have not been impacted by the Covid-19 outbreak thus far. However, should its construction works/collection of progress payments be delayed materially in the coming months, we see potential stress on Yongnam’s cash flow.

Downgrade to HOLD with lower Target Price of S$0.09

ONG Khang Chuen CFA CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-01
SGX Stock Analyst Report HOLD DOWNGRADE ADD 0.09 DOWN 0.280