OSK-DMG: "Lian Beng is a high-conviction pick", target $1.17

Excerpts from analysts' reports

OSK-DMG says Lian Beng Group is a high-conviction pick in the construction sector

Analysts: Sarah Wong & Terence Wong, CFA

ong_chairman Ong Pang Aik, executive chairman of Lian Beng Group. NextInsight file photo Lian Beng reported strong 3QFY14 results, and is well-poised to deliver SGD68.3m PATMI for FY14F (from SGD61.7m). Due to its growing, diversified businesses, we now value Lian Beng at SOTP-derived TP of SGD1.17.

The existing share price at 5.0x FY14F P/E underestimates its superior construction business that yields >10% net margins, incoming property development profits, its burgeoning dormitory and ready-mixed concrete (RMC) businesses with recurrent earnings.

Strong 3QFY14 results and raised FY14F earnings. PATMI grew 67.0% y-o-y to SGD50.3m in 9MFY14F.

This was driven by a one-off full recognition of profits from its 55%-owned industrial property, M-Space, as well as decent growth in the construction and RMC segment.

We raise earnings in FY14F by 10.7% to SGD68.3m from the previous SGD61.7m.

Growing a strong recurrent stream of earnings; changing earnings profile. Lian Beng has amassed a steady stream of recurrent earnings via its diversification into the dormitory and RMC business, which we estimate to contribute SGD15.1m in FY15F. With its latest venture into asphalt premix, Lian Beng’s recurrent earnings stream could potentially hit SGD20m by FY16F.

Deeply undervalued – Maintain BUY; TP raised to SOTP-derived SGD1.17. Lian Beng has grown and diversified its earnings across a few construction-related businesses, we find the SOTP valuation more appropriate.

The following underpin its valuation:

i) 6x P/E on its bread and butter construction segment, which we forecast to contribute SGD46.0m in FY15F. This is a superior business with >10% net margins and is set to ride the construction upcycle with its strong balance sheet, execution track record and massive existing orderbook of SGD1.08bn;

ii) unrecognised development profits of SGD204.2m from Midtown Residences/The Midtown (95% sold) and Spottiswoode Suites (c.60% sold) on a fully-sold basis;

iii) a steady stream of earnings of SGD6.94m from freehold Mandai dormitory in FY15F. DCF-derived value of SGD107.6m in its 55%-owned stake; and

iv) 10x P/E on a growing RMC segment of a forecast SGD8.2m PATMI in FY15F.

At 5.0x FY14F P/E, Lian Beng is deeply undervalued. BUY.

Recent story: LIAN BENG: Stock price up 17% in 4 weeks; 9MFY2014 net profit up 132%

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Counter Name

Last

Change

AEM Holdings

1.860

0.020

Best World

2.500

0.020

Boustead Singapore

0.950

Broadway Ind