Eyes SGD670m worth of contracts in 2H13. We continue to like Yongnam as it is a prime beneficiary of Singapore’s infrastructure growth story, given its position as the strongest structural steel player locally with the largest strutting asset inventory. We believe it has hit the bottom of the cycle and is geared up and ready to replenish its orderbook. Yongnam is tendering for SGD670m of potential projects which would commence in 2H13. Reiterate BUY with a TP of SGD0.40. Transferring coverage of Yongnam Holdings to Alison Fok.

MRT ensures steady pipeline of contracts. Based on past records, the Land Transport Authority will spread out the awarding of MRT contracts in order to minimise land traffic disruption. This translates to a healthy work pipeline for at least 17 years until 2030. Sixteen Thomson Line civil contracts have been placed out, with three already awarded to the main contractors. We expect subcontracts will be given out in late 2013 or early 2014. As a rough gauge, Yongnam has won around SGD200m worth of contracts for Downtown Line (DTL) Stages 2 and 3. It is currently in talks with SK E&C, the new contractor for the DTL Stage 2 project, to resume work. We expect Yongnam could start work as early as next month.

Good long-term outlook. Yongnam continues to tender for projects overseas such as the Hong Kong MTR extension line and the KL Metro Line. We highlight M+S Pte, a 60:40 joint venture between Khazanah Nasion and Temasek Holdings has appointed Obayashi Corp for Duo project in Rochor, and Marina One to a consortium made up of Hyundai E&C and GS E&C last week. Yongnam has worked Obayashi previously for One Raffles Quay as well as Hyundai in various projects. We think Yongnam stands a good chance of winning contracts from this.

Orderbook replenishment a key priority. We expect Yongnam’s share price to be driven by contract wins rather than earnings this year. Of its existing orderbook of SGD266m, 44% will be recognised by year-end. With several projects coming to fruition this year, namely, Marina Coastal Expressway, earnings growth would likely ease in 2H13 and 1H14 on slower orderbook replenishment. Gross margin, too, would stay flat on increased contributions from structural steel-works. But we remain positive on Yongnam’s contract wins going forward.

Catch-up opportunity to peers; reiterate BUY. Given that Yongnam is tendering for an overall SGD1.3b worth of contracts, we do not think the stock should be trading at 8.1x FY13F PER. Instead, it should trade closer to its closest peer, Malaysia-listed Eversendai, at 11x forward PER. We keep our TP unchanged at SGD0.40, pegged at 11x FY13F-15F earnings.

Source: Maybank Kim Eng Research - 9 Sep 2013