Published May 20, 2009

Yongnam shows its steel in infrastructure boom

By VEN SREENIVASAN

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THE past few weeks have been good for the Singapore market, especially for construction stocks. Names such as piling specialist CSC Holdings, Tiong Woon and crane lessor Tat Hong have been in the spotlight on expectations of swelling order books as Singapore braces for a huge wave of infrastructure and property development activity.

Yongnam appears to be the only player here with the capacity to handle growing demand for structural steel.

Analysts have been upping the earnings forecasts and stock price targets on many of these companies on account of huge increases in infrastructure spending in Singapore.

And this, in turn, has fuelled active interest in infrastructure plays. How much of this is real and how much of it is mere hype remains to be seen.

Nevertheless, there are some genuine gems out there.

One of these is structural steel and construction engineering specialist Yongnam.

Listed in 1999, Yongnam is Singapore's single largest fabricator of steel structures used in infrastructure. Its fabricated structural steel holds up the roofs of Suntec City, the National Library, Singapore Post Centre, Capital Tower, the Expo MRT station, KL International Airport and the new Suvarnabhumi Airport in Bangkok, among others.

Its strutting systems support almost 90 per cent of the underground works at Circle Line MRT and at least 9km of the Kallang-Paya Lebar Expressway.

The company - which sees Singapore, the Middle East and India as its three strategic driving forces - recently announced it had clinched three new contracts totalling about $40.4 million for the Dubai Metro.

This added to the group's growing portfolio of contracts for the Dubai Metro that it first won since its beachhead into Dubai in mid-2007.

The company's revenue contribution from the Middle East has surged from $65.1 million in FY2007 to $143.3 million in FY2008. While the company prefers to remain rather low profile, its recent set of results provides valuable clues about its enormous growth potential.

It recently unveiled a 104 per cent year-on-year surge in 1Q09 net profit to $9.9 million , thanks to buoyant inflow of structural steelwork and specialist civil engineering contracts.

This came after a FY08 full year earnings jump of some 38 per cent to $34 million, on a 91 per cent jump in revenue to $332.74 million. Its existing current orderbook of some $520 million includes key projects such as the Delhi International Airport Terminal Building, the new Dubai Metro, the Vista Exchange development in Rochester Park and the Marina Bay Sands.

Another major job is a project for the Marina Coastal Expressway, which is a 5-km long strategic underground east-west transport link for three major expressways.

More projects could be in the pipeline, especially in India, where the Congress-led alliance has just won decisively in the recent national elections.

In its bid to reform and modernise India, analysts see the new Congress-dominated government pushing ahead aggressively with a slew of much-needed new infrastructure projects across the country.

And Yongnam, having grabbed a strong toe-hold in New Delhi, could benefit from this development.

In fact, company officials themselves recently said Yongnam was now 'fortifying its presence in India, where the group was working on Delhi International Airport'.

Meanwhile, back home in Singapore, the government will spend up to $20 billion on public-sector construction this year, in projects like the Downtown MRT Line, Marina Coastal Expressway, Sports Hub, a new cruise liner terminal, parks in the Marina Bay area, new and the upgrading of HDB estates, water and drainage projects, schools and such.

And, as analysts such as Lawrence Lye of CIMB note, up to another $17 billion will be spent annually on public-sector construction in 2010 and 2011.

With more than 30 years of experience, Yongnam appears to be the only player here with the capacity and capability to handle this growing demand for structural steel and struttings required by the impending infrastructure boom.

Its 76,000 square metre facility in Tuas - the size of over 20 football fields - has a total annual production capacity of some 78,000 tonnes of steel fabrication. Barriers to entry into this business are high, especially in struttings.

Analysts like Mr Lye project the company to post net earnings of some $41 million this year. But given the potential market, especially offshore in places like India, this could prove to be a somewhat conservative estimate.

In a business notorious for its 'feast-and-famine' cycle, Yongnam looks set to enjoy one very big and extended party as it heads into an industry sweet spot.