CREDIT SUISSE upped its rating on Singapore’s largest structural steel contractor, Yongnam, to “Outperform” on Thu, raising its target price to 30 cents from 18 cents.
Of the 4 construction stocks it currently covers, Yongnam is the only positive pick.
The Swiss broker sees Yongnam as a frontrunner to securing strutting sub-contracts of large-scale infrastructure projects by virtue of its leading market share.
Yongnam had doubled its 1Q09 net profit yoy to $4.8 million and had an order book of S$517 million as at 31 Mar 2009.
The broker expects Yong Nam’s order book to reach S$700 million by FY10, and says this will be progressively recognized over the subsequent three years.
“Revenue contribution from structural steelworks would be driven primarily by private sector orders, while specialist civil engineering works should rise on the back of Marina Coastal Expressway and Downtown Line related contracts,” said Credit Suisse.
”The strong operating leverage of Yongnam’s model should also drive margin expansion gains,” added the broker.
Yong Nam closed at 24.5 cents on Friday, 22% short of its price target.
Outlook does not justify sector's price run-up
Construction stocks have more than doubled in price over the past 3 months compared to a STI advance of about two-thirds, but Credit Suisse believes that this “price outperformance does not reflect corresponding fundamentals.”
3 areas of concern were cited:
* Firstly, 1Q09 construction demand was down 57% yoy to S$4.2 billion, and the broker believes that total contracts awarded in 2009 would likely come in at the low end of the Building & Construction Authority’s forecasts of S$22 billion to 28 billion.
* Secondly, the pipeline of public sector projects is unlikely to offset the deceleration in private sector orders. Private sector orders contributed 60% of total construction demand in 2008, and have fallen 86% yoy.
* Thirdly, average order book backlog has declined sharply, reflecting slowing private sector contract momentum resulting from weaker property market fundamentals.
| Construction Stocks covered by Credit Suisse | 3 Jun 09 Price | Call | Target Price |
Hong Leong Asia | S$1.42 | Neutral | S$1.20 |
Tat Hong | S$1.04 | Underperform | 95 cents |
Tiong Woon | 48 cents | Neutral | 45 cents |
Yongnam | 25 cents | Outperform | 30 cents |
Credit Suisse remains cautious on Tat Hong and Tiong Woon, due to a sustained decline in crane rental rates.
Recent story: YONGNAM benefits from government spending
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Read why Sebastian Chong is hot on Yongnam in STOCK CHALLENGE: Sebastian starts new game with a 57% gain!
