Excerpts from UOB KH report
Analyst: John Cheong
Tiong Woon Corporation Holding (TWC SP)
FY22: Healthy Double-digit Earnings Growth; Expect A Better FY23
|Tiong Woon’s FY22 earnings of S$11.4m (+15% yoy) is achieved on the back of a 9% yoy growth in revenue and 2.6ppt increase in gross margin due to better demand for crane and higher crane rental rate.
Maintain BUY with a 3% lower target price of S$0.85 (0.7x FY22 P/B).
• 15% earnings growth from better revenue and gross margin. Tiong Woon Corporation Holding (Tiong Woon) reported FY22 earnings of S$11.4m, which grew 15% yoy due to an increase in revenue of 9% yoy from better demand for cranes.
In addition, gross margin also improved 2.6ppt to 40.2% as a result of higher crane rental rate. Similar to FY21, close to 80% of TIong Woon’s revenue is still generated from Singapore.
• FY22 results fell short of our expectation due to higher-than-expected provisions. Despite the commendable growth, FY22 earnings fell short of our expectation due to higherthan-expected impairment loss for receivables made amounting to S$2.2m (+43% yoy) in FY22 as a result of higher provision made for a few customers amid the uncertain credit environment.
In addition, revenue for 2HFY22 was around S$10m lower than expected, only growing 2% yoy and flat hoh, due to work stoppages by customers in the construction sites because of dengue infections, workplace accidents and heavy rain. Also, Tiong Woon’s customers in the oil & gas industries, which typically offer higher margin, have yet to commence their construction activities.
• Expect 54% yoy EPS growth in FY23 as more construction projects in Singapore drive demand for cranes. We expect Tiong Woon’s FY23 earnings to grow by 54% yoy, driven by the improved utilisation rates and higher rental rates of its cranes due to demand from contractors. This will lead to an increase in its gross margin, followed by better earnings.
Tiong Woon is in a good position to benefit from the strong resumption of activities in Singapore’s construction sector, which will have strong demand for cranes in the coming years driven by accelerating construction of public housing and new mega infrastructure projects.
• Well-positioned to benefit from construction industry upcycle. With comprehensive ownership of more than 500 cranes, some of which can have a capacity of up to 1,600 tonnes each, Tiong Woon is in a good position to benefit from the strong resumption of activities in Singapore’s construction sector and rising capex in the oil & gas industry.
The construction sector will have strong demand for cranes in the coming years driven by accelerating construction of public housing and new mega infrastructure projects including the Cross Island Line, Changi Airport T5, Tuas Mega Port and the North South Corridor.
The Housing & Development Board plans to launch up to 23,000 flats a year in 2022-23, a huge jump from the 48,509 flats launched in 2019-21 (16,170 flats per year). In addition, construction of more petrochemical plants could further boost crane demand.
• Reduce revenue and earnings estimates due to results miss. We reduce our FY23/24 revenue estimates by 14%/17% as we reduce the utilisation rate of cranes. In addition, we add in additional impairment loss for receivables amounting to S$2.1m for FY23 and FY24 to reflect a more conservative accounting stance on trade receivables. As a result, our FY23/24 earnings are reduced by 39%/36%.
• We estimate Tiong Woon’s crane rental rates to grow around 10% for FY23-25, while the rest of the revenue growth will be driven by higher utilisation rates. As a result, Tiong Woon will enjoy positive operating leverage as cost increases will remain largely limited. We expect gross margin to expand to 41.5%/42.0%/42.5% for FY23/24/25 respectively.
Combined with revenue growth of 12%/11%/10%, this gross margin expansion will drive earnings growth of 54%/25%/20% for FY23/24/25 respectively.
• Risks include: a) Slowdown in the construction industry, b) termination of construction works or major delays due to COVID-19, and c) shortage of labour.
• Maintain BUY with a 3% lower target price of S$0.85, pegged to an unchanged 0.7x FY22 P/B, 1SD above Tiong Woon’s historical 15-year average P/B, to capture the strong earnings growth potential in the industry upcycle.
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• Better-than-expected earnings from higher crane rental rates and utilisation rate.
• Better-than-expected dividend and share buybacks.
• Potential takeover offer by other larger crane companies given the attractive P/B valuation.
Full report here