Operating loss expected in 3Q13, downgrade to HOLD. Yongnam is expected to report an operating loss in the upcoming 3Q13 (to be released on 11 November) due to two factors - (1) Cost overruns from three ongoing projects; and (2) A significant one-off loss on disposal of fixed assets. We lower our earnings estimates for FY13-15 by up to 37%, which places us significantly lower than consensus estimates. In view of the upcoming losses, which will dent FY13 earnings, and in the absence of new contracts being secured YTD, we are less optimistic about its earnings prospects. This leads us to downgrade Yongnam to a HOLD with a SGD0.24 TP, based on 10x FY14 EPS P/E (previously 10x FY13-15E P/E).

Project cost overruns from Sports Hub. Based on our channel checks with other industry players, we understand that the cost overruns primarily relate to the Sports Hub that is to be completed by April 2014. This could be due to the complexity of the construction works and tight schedule.

Not all is lost – new contracts to come. We expect new contracts to be secured in the coming months. We suspect M+S projects will be the key contract. MRT Thomson Line contracts are periodically placed out to main contractors and sub-contracts should be announced in 4Q13, at the earliest. We have factored in SGD150m and SGD350m new contracts into our FY13-14 forecasts, respectively.

Downside risk appears limited. In our view, the share price should be well supported at the current levels with the stock trading at 0.9x FY13 BVPS – one standard deviation below its historical mean since 2008 – and our projected dividend yields of 3-4% from FY13-15. With public infrastructure remains as a strong focus in this region, we expect the pipeline of structural steelworks to stay healthy in the medium term for Yongnam. Potential new contracts secured should replenish its outstanding order book of SGD266m at end-June 2013.

Source: Maybank Kim Eng Research - 1 Nov 2013