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Yongnam Holdings: Forging A Solid Foundation In Steel
Corporate Digest | 25 August 2011
By: Simeon Ang
Articles (125) Profile

According to recent figures released by the Building and Construction Authority of Singapore (BCA), building and construction contracts in 2Q11 grew by 10.6% year-on-year. Public contracts saw a near 2.5 times leap over the same period last year, mirroring a revived political will to drive up infrastructure construction. This news coupled with the 1.6% year-on-year growth in 2Q11, a second consecutive quarter of growth on sequential basis at 13.8%, continues to paint a rosy picture for the industry.

Established in 1971, Yongnam Holdings Limited operates two core business divisions namely, structural steelworks and specialist civil engineering. Both of which are knee deep in connections with the local infrastructure construction industry. Today, Yongnam has one of the largest steel fabrication facilities in Southeast Asia, with a total combined floor area of approximately 49,000 square metres, producing steel structures of around 80,000 tonnes a year. In evidence of its role as a leading steel specialist contractor, the Singapore Structural Steel Society had granted Yongnam the S1 category accreditation in its Structural Steel Fabricators Accreditation Scheme. The accreditation, which is the highest in the scheme, affirms Yongnam’s capabilities, infrastructure and resources to fabricate and erect steel structures of over 30 metres in height.

Racking Up Regional Iconic Projects

Yongnam has grown beyond the local industry to undertake projects across the region in countries as far away as Norway, the Middle East, Japan, Pakistan and India. Yongnam has had a hand in the construction of iconic local projects such as the Marina Bay Sands Integrated Resort, Gardens By The Bay, ION Orchard as well as the Suvarnabhumi International Airport in Bangkok and India’s New Delhi International Airport.

In 2Q11 alone, the company secured four new projects, comprising a $75 million structural steelworks of a dome-shaped roof for the Singapore Sports Hub, a $19 million contract for the new 22-storey National University Hospital Medical Centre, a $50 million contract for the National Art Gallery, and $49 million worth of specialist civil engineering sub-contracts for the Hong Kong Section of the Express Rail Link.

Currently, Yongnam is involved in steelwork projects such as the construction of the corporate and lifestyle hub Vista Xchange, worth $88.1 million, and the construction of the roof structure and composite steel columns of the Mumbai International Airport, worth $69.9 million. On-going civil projects include 6 contracts worth $351.9 million for the Marina Coastal Expressway and the contracts for MRT Downtown Line 2 worth $108.9 million.

Potential projects that have been earmarked by management recently include the South Beach Development, additional contracts in the Singapore Sports Hub and The Haramain High Speed Rail in Saudi Arabia.

Income Stream Diversification

In an attempt to diversify its income streams to business segments with better profit margins, Yongnam embarked on a new expertise in specialist civil engineering through the development of a modular strutting system. The system has a greater load carrying capacity and provides larger clear spans. This created a significant competitive advantage as it allows Yongnam to respond to clients’ requirements immediately without the need to produce or fabricate the components on site. Presently, Yongnam has a stock of different components with a total cost of approximately $54.4 million.

As of Yongnam’s 1H11 financial results, its specialist civil engineering division contributed $71.5 million (45.5%) to its revenue mix, while its structural steelworks division contributed $85.8 million (54.5%).

Sturdy Performance

Yongnam’s 2Q11 performance unveiled a 12.9% leap in earnings to $15.1 million on the back of reduced operational and finance expenses, in spite of a marginal 1.9% drop in revenue to $82.5 million. The breakdown of its revenue shows an upsurge of 17.7% in takings from its specialist civil engineering division. It commands a higher margin as compared to the structural steelworks division, which fell 15.2%. Supported by the improved earnings figures, the company’s earnings per share for 2Q11 grew 12.1% to $0.012 from $0.0107 a year ago.

Yongnam’s latest 2Q11 result was well received by analysts. CIMB Research maintained an Outperform rating on Yongnam as the 2Q11 net profit met its estimate and consensus. The broker estimated that the company is bidding for $1.2 billion worth of projects this year.

Meanwhile, DBS Vickers noted on the improvement in Yongnam’s order book, of which 63% comprises of specialised civil engineering projects. The local broker maintained a Buy call on the stock, and opined that the stock is significantly undervalued, trading at a price-to-earnings ratio of less than 5 times.

With Yongnam’s strong order book of $509 million as at 30 June 2011, the company, we believe, is slated to only grow in these times of continued public sector spending.

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Source: FactSet Fundamentals ©FactSet Research Systems

Simeon, an LSE graduate, is currently the editor of Aspire. He specialises on topics surrounding trading psychology, politics and macroeconomics.

Please click here for more information about this author.

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