This article was first published on AK71's blog, and is reproduced with permission

stkchart11.13Yongnam stock closed at 24.5 cents last week. Chart by BloombergYONGNAM HOLDINGS' share price declined more than 10% early this morning (31 Oct). Reason?

The management issued a profit guidance. It is more like a fair warning that the latest quarter's results will be negative and that investors should not be too optimistic. This is due to:

1. Cost overruns from 3 on-going projects, paring operating margin to new lows, and

2. A significant one-off loss on disposal of some fixed assets.

So, what did I do? Thanks to an SMS alert from a friend, I did a quick read of the announcement before buying more at 24c a share.

strutsYongnam's steel struts are used and re-used for tunneling projects. Photo: CompanyI believe that Yongnam's position in the construction industry is not shaken.

It owns a large inventory of reusable steel struts which are valuable assets as they also present a high barrier to entry in Yongnam's niche in the industry.

The decline in share price has presented a good opportunity for me to buy into the business at a discount to NTA (26.20 cents a share as at end-June 2013). 

I cannot see how it is a bad idea to own what Yongnam has at a discount.

Of course, cost overruns and suffering losses are unpleasant but we are buying a business with an eye on its future.

So, it is important to question if such instances will become the norm? Will they happen again and again in the future? Will they be persistent?

I am of the belief that these are one-off events and that Yongnam's balance sheet will not be negatively impacted in any big way. 

seow_soon_yong_vertYongnam CEO Seow Soon Yong. NextInsight file photoFY2013 to be still profitable

Overall, Yongnam will still remain profitable for the year although it will pale in comparison to the year before.

Yongnam's future is bright as they will be a beneficiary of the government's drive to double the MRT network in Singapore and there will be work aplenty until 2030.

Even if there should not be any iconic projects (which is unlikely), Yongnam will probably have quite a bit of work to keep them busy in the years ahead.

When one-off events like this send Mr. Market into a manic depression, they present a chance for me to buy a business with a proven track record and a bright future at a discount.

Some of us might remember there were times when Mr. Market was very optimistic about Yongnam (for example, on the Myanmar airport projects).

Its share price rose to be much higher then. That was probably a bad time to buy.

Please note that I am not glossing over the challenges that Yongnam is facing. Like other construction companies, Yongnam is having a hard time with cost pressures.

With a 3Q loss, they might or might not pay a dividend for the year although a lower DPS should not be demanding. Without major CAPEX in the year, this is a possibility.




A selection of readers' comments posted on AK71's blog:

Solace said...Hi AK, I am glad we have the same perception on this one :) May we be rewarded one day haha. Patience!

October 31, 2013 at 9:05 PM

 
AK71 said...Hi Solace, My long position initiated in early 2012 at 24.5c a share is 85% divested. Today, I am quite happy to "replenish" my stock. ;p

October 31, 2013 at 9:11 PM 

sillyinvestor said... Hi Ak, I was looking at Yongnam rather closely after the fall. I am quite happy with their business capabilities, and their ability to capture market for the "iconic buildings"


But their corporate actions/governance? made me rather uncomfortable

1) Employment shares options (ESOS), the number of options might be less than 10% of shares oustanding, but almost all of it is given to the directors, I know directors have executive roles, but what about the top executives?
The exercise period for share option is up to 10 years, and one option of determining the exercise price is at a DISCOUNT subject to a maximum of 20% DISCOUNT...WHOA!! How generous... I think they are opportunistic and unapologetic with this scheme too. At 2009, they issue 20,248,000 with an exercised price of 8 cents.The highest exercised price is 29.4 cents with only 350,000 options issued at 2007. I am surprised such a scheme get approved in 2004! 

2) They didn't pay themselves badly, they take home more than 10% of NP for years now. 

3) They don't pay dividend well, granted it has been increasing, but payout ratio is decreasing except for last year, even during the boom year of 2011, they did not declare special dividend, but they didn't forget to increase director pays. The dividend payout is less than 20% for years except 2012, assume they become generous and will payout 30% with the maturing of the business, with the peak eps of 5 cents, you get 1.5 cents, that will be 6.25% yield(Not bad). It will not happen this year, and the peak might be a optimistic projection 

I did compare the pay with TTJ, their closest competitor, to see if its a norm, sadly, it is not.

Dun get me wrong, I am OK with competent directors being pay well. But either by their pay or by options. If they are pay well on both ends, I expect them to pay shareholders generously well too. I think Yongnam directors only pass the competence test.

Sorry if I sound too critical and pour cold waters to anyone.

Also for Yongnam to do very well like the peak year, the market must by favourable in both the Specialist civil engineering and structural steelwork segments in Singapore. I am not sure about the structural steelwork outlook in Singapore, but they could get around this by going overseas, since they have some success overseas. 

But overseas market make up only a small part on their business and is rather ad hoc, I am not sure which country do they have a consistent stronghold.

Finally, I guess the project that could go into overun costs should be belt conveyor structure project in Malaysia. It is due to be completed by 3Q2013, any overrun must be declared, sports hub and art gallery are due for completion in Q4 and 2014Q1 respectively, shouldn't there be enough time to make up lost time? If I am right in this count, it points to the inherent higher risk in operating in overseas market.

Also, e... no discriminating la, but ask me whether project in malaysia or singapore more likely to run into overrun problems...;p 

November 1, 2013 at 11:19 AM

AK71
 said...

Hi Mike, Thanks for sharing your analysis and your concerns regarding Yongnam's directors' compensation.

The fact that, collectively, they own less than 20% of Yongnam's stock probably means that their interests are less aligned with that of minority shareholders'. This has crossed my mind before.

However, as I like to look at the big picture first always, I believe that this niche player in the construction industry with a relatively low gearing level will continue to do well.

Investors who have stuck with Yongnam through thick and thin in the last 10 years would be holding on to a multi-bagger. I don't think they would have minded the lack of a dividend now.

I am not averse to paying managers well or, indeed, better than average, if they are able to add value to my investment and I feel that Yongnam is able to do this. 

It has hit a rough patch now. Will it recover? Willing to hazard a guess?

The stock seems quite tradable too. So, for those who are inclined to, they could do a bit of trading while waiting. ;p

November 1, 2013 at 11:40 AM


Solace said ...Hi AK, Was away for a few days from your blog, only to come back to see very good quality of exchange of comments :)

i will also add in why i open a long position for yongnam. Scuttlebutt is one of the most underused fundamental techniques in our digital age.

By knowing people in the industry and communicating with them on a regular basis will reveal the economic moat of Yongnam.

Structural Steelworks one of the core business divisions is a key pillar of yongnam. The quality and brand name is unmatched by competitors in the regions.

If one have studied the finer details of the industry, one would realized the demand for steel structure will start to outpace the demand of cement. Moving forward, the demand should grow even stronger.

Another thing i look at is "Has the fundamentals of the company really change when it trading at 38 cents compare to now when it is trading at 24 cents?" If the basic fundamentals of the company is still the same, then with a lower P/E, P/B it presents a excellent opportunity to buy.

Hope that this will provide us with some rooms for thoughts and adds to the excellent exchange of comments here

November 3, 2013 at 12:09 PM


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