Maintain HOLD, TP at SGD0.24. 9M13 results met our toned down expectations following the recent profit warning announced two weeks ago. As forewarned earlier, the drag came from: (1) cost overruns from three ongoing projects in Singapore; and (2) a significant one-off loss on disposal of fixed assets. We remain cautious on Yongnam’s FY14 earnings from a lack of contract wins YTD, and trim our FY13 estimate marginally. Maintain HOLD at SGD0.24 TP, based on 10x FY14 EPS PER.

Sports Hub as key project for cost overruns. 9M13 revenue was up 35.0% YoY to SGD293.2m, while earnings fell by 50.5% YoY from cost overruns and one-off losses. Core profit fell 15.6% YoY from lesser earnings recognition. Yongnam recorded SGD10.8m of cost overruns from three projects with Sports Hub accounting for most of them, with minor losses from Suntec City and Victoria Theatre. The management explains the fabrication process was more complicated than expected. No further provision is expected in the future. Secondly, Yongnam recorded an SGD8.1m one-off loss from the sale of pipe piles from Marina Coastal Expressway contracts.

Gross margin bottoming out. On a more positive note, excluding the cost overruns from projects, Yongnam’s gross margin improved 0.7ppt QoQ to 20.1%. Structural steelwork revenue rose by 95.8% YoY to SGD56.8m, partially offset by specialist civil engineering works which fell 7.4% to SGD39.0m.

Order book contracts 48.2% QoQ. Yongnam’s order book stood at SGD229m at end-September, following the completions of Marina Coastal Expressway and MRT contracts. Yongnam is now bidding for SGD1.2b worth of contracts which we conservatively forecast a contract wins of SGD150m in FY13 and SGD350m in FY14.

Trading in-line with industry average. Yongnam is trading at 10.4x FY14 PER, which is in-line with industry peers’ average of 10.5x. While we like Yongnam’s dominance in structural steel works, the slowdown of contract win momentum weighs negatively on its earnings outlook. In our view, the current share price is well-supported at 0.9x FY

Source: Maybank Kim Eng Research - 12 Nov 2013