YONGNAM: Potential for special dividend, says DBS Vickers

Excerpts from analyst's report

DBS Vickers analyst: Alfie Yeo

• S$60m deal with Axis REIT for its freehold production facility in Malaysia
• Non-core gains of S$34-35m recognized upon completion (by 31 Dec 2014)
• We believe there is potential for special dividends barring major acquisitions/projects

Seow-Soon-Yong_SIAS Seow Soon Yong, CEO of Yongnam Holdings (right) receiving SIAS award for Most Transparent Company in Construction & Materials industry last year. NextInsight file photo.What's new
Sale and leaseback with Axis REIT. Yongnam announced this morning that it has entered into a sale and leaseback transaction with Axis Real Estate Investment Trust for its Malaysia freehold production facility located in Nusajaya Johor, Malaysia.

Under the sale and leaseback agreement, Yongnam will sell the property for RM153.5m (c.S$60m) and will lease it for 15 years with renewal option for another 15 years. Initial rent for the first three years will be RM969,313 (c.S$378,638) with step ups every three years.

Yongnam will book a disposal gain of S$34-35m over its net book value of S$24.5m. It is Yongnam's intention to enhance its financial position by unlocking equity tied up in the property.

The proceeds will be redeployed as working capital for projects, and will fund investments in infrastructure developments in the region. Axis Real Estate Investment Trust is a real estate investment trust listed on Bursa Malaysia. The transaction is expected to conclude before 31 December 2014.

Our View
Non-core asset disposal; potential for special dividends barring major acquisitions/projects. The transaction is non-core and one-off even though net profit will be boosted by gains of S$34-35m. We are positive on the c.S$60m cash proceeds that it will potentially receive.

Although Yongnam stated that sale proceeds will be redeployed for investments and working capital, we believe Yongnam can afford to pay special dividends provided it has no major investments/acquisitions in the pipeline based on the following:

1) During the construction peak in FY08, cash balances amounted to <S$40m, less that the S$60m that Yongnam will potentially receive.

2) Average cash balances maintained from FY10-FY13 was <S$20m and annual dividends amount to <S$13m. Hence, S$60m could be in excess of what Yongnam requires barring major acquisitions/projects.

We are positive ONLY on the special dividend angle, as apart from that, Yongnam’s order book is depleting and the company needs to win more projects before we turn positive on its core business.

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