YONGNAM HOLDINGS LIMITED (SGX:AXB)
Yongnam Holdings - Hurt By The One-month Stop Work Order
- Construction works in Singapore are halted for a month under the circuit breaker measure announced by the government.
- Yongnam (SGX:AXB)’s ICR is weak due to low profitability; and the one-month stop work order could put further stress on its cash flow.
- We downgrade Yongnam from Hold to REDUCE with a lower Target Price of S$0.074.
One month stop-work order on construction sites
- Construction works in Singapore are halted for a month (7 Apr to 4 May), in line with the circuit breaker measure announced by Singapore government to mitigate the spread of Covid-19. With the stop work order, we can expect minimal progress billings for Yongnam in Apr.
- There is still room for Yongnam to catch up in the later part of the year as the situation improves, but we see short-term negative earnings impact from the circuit breaker, given construction companies’ large fixed cost base.
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. The one-month stop work order could impact Yongnam’s construction works/collection of progress payments, potentially stressing the company’s cash flow.
Lower FY20F EPS by 82.7%
- Notwithstanding Yongnam’s order book recovery from a multi-year low, we note that many projects were still in early rollout phase.
- Factoring in the one-month impact from stop work order, we lower our FY20F EPS forecast by 82.7%, and now expect Yongnam to record a net loss of S$18.3m in FY20F.
- We are still expecting Yongnam to achieve profitability in FY21F as its strut utilisation rate further improves, allowing it to better absorb overhead costs.
- We lift FY21/22F EPS by 30.0%/5.6% due to some spillover progress billings from construction work delays.
Downgrade to REDUCE with a lower Target Price of S$0.074
- We downgrade Yongnam from Hold to REDUCE due to near term cash flow concerns arising from the one-month stop work order. Our Target Price is consequently lowered to S$0.074, pegged to 0.21x FY20F P/BV (Yongnam’s historical trough P/BV).
- See Yongnam Share Price; Yongnam Target Price; Yongnam Analyst Reports; Yongnam Dividend History; Yongnam Announcements; Yongnam Latest News.
- Upside risks include further announcements of contract wins.
- Key downside risks to our call include further project delays.
- Read also sector report: Construction & Material Sector - CGS-CIMB Research 2020-04-13: Feeling The COVID-19 Pinch.
ONG Khang Chuen CFA
CGS-CIMB Research
|
https://www.cgs-cimb.com
2020-04-13
SGX Stock
Analyst Report
0.074
DOWN
0.09
