• Disappoints with wider-than-expected FY18 net loss. Yongnam's order book recovered from multi-year low, ending at S$366m as at end-Dec 18.
• With 45-50% of order book (c.S$172m) slated for completion this year, we now anticipate a slower recovery with narrowing losses in FY19F.
• Maintain ADD with a lower Target Price of S$0.33 as we expect losses to narrow in FY19F and a possible turnaround to profits in FY20F.

FY18 Losses Wider Than Expected

• YONGNAM HOLDINGS LIMITED (SGX:AXB) reported an FY18 net loss of S$51m (accounted for 144% of our forecast) mainly due to a dearth of major projects executed in the year.
• FY18 revenue rose 47% y-o-y to S$161m.
• Strut assets were under-utilised at 25%, resulting in overhead costs of S$30m that were not covered during the year.

Positives: Order Book Recovers From Multi-year Low to $366m

• As at end-Dec 18, Yongnam's order book stood at S$366m, of which 45% will involve N103 North-South Corridor (NSC) works in a main contractor role, 24% in specialist civil engineering while the remaining 31% in steelworks and other works. About 45-50% of the order book (c.S$172m) is slated for completion within FY19F.
• We estimate Yongnam would need to recognise over S$300m in revenue to return to profits.

Anticipating Further Strut Works From NSC to be Won This Year

• As part of the JV that has secured the N103 contract, we think Yongnam would likely undertake strutting works (worth S$50m) that has yet to be awarded.
• With all 11 NSC contracts having been awarded to main contractors in Nov 17-Jan 19, Yongnam believes it could potentially win half of the available strut works for NSC as a sub-contractor in FY19F, given that it owns 210k tonnes of strut assets – the largest in Singapore.

Long-term strategy is to undertake projects as a main contractor

• Management recognised the challenges such as trending lower margins from projects undertaken as a sub-contractor, thus the long-term strategy is to build up capabilities towards a main contractor.
• We believe it would team up with established contractors (such as the JV with Leighton for N103) to bid for major upcoming infrastructure projects – Jurong Regional Line, Changi Terminal 5 and Cross Island Line – ahead. Design-and-build is another segment that the group is looking at to further build up its competency.

Maintain ADD With a Lower Target Price of S$0.33

• With the worst now over in our view, we anticipate losses to start to narrow this year and look to a possible earnings recovery in FY20F. Yongnam is currently trading at 0.4x P/BV, 1.s.d. below its 10-year average of 0.9x.
• We introduce our FY21F forecasts and retain our ADD call with a lower Target Price of S$0.33, now pegged to 0.7x (previously 0.8x). FY19F P/BV (20% discount to its long-term average of 0.9x).
• Major contact wins would be the potential upside catalysts.
• Key risks include project delays.

Source: CGS-CIMB Research - 28 Feb 2019