Lian Beng Group (KimEng)

We reinitiate coverage on Lian Beng Group with a BUY rating and target price of $0.62. Its orderbook remains robust at $839m; its earnings are reinvested in its construction business to ensure sustainability of income in the event of a downturn; and its engineering and concrete subsidiaries are ready to be spun off for listing in Taiwan. The group is also building a workers’ dormitory on a freehold industrial land acquired in January this year and rental yield is expected to exceed 13%. Dividend yield, too, is an attractive 4.6%. Therefore, we see no reason for Lian Beng to trade at an undemanding PER of 3.9x, a sharp discount to its peers at 6.3x.

Our View

Lian Beng’s orderbook of $839m will help the group maintain its current profitability for the next three years. There is no shortage of jobs as the group has the highest market share of construction contracts from GLS sites sold since 2009 that are gradually coming on-stream.

Lian Beng has $150m in cash and a stable construction business that generates free cash flow of $70m every year. It has announced plans to list its engineering and concrete subsidiaries (17% of FY May11 earnings) in Taiwan. This will further solidify its cash position while allowing these businesses to be self-funding and to grow independently.

The freehold industrial land at Mandai Estate will strengthen Lian Beng’s sustainable income base. Part of the land will house a 3,500-bed workers’ dormitory with gross yield estimated to exceed 13% and net margins approaching 50%. The remaining land could be developed and sold for over $40m in pre-tax profits, more than 20% of Lian Beng’s market cap.

Of the three main contractors with sizeable orderbooks (over $800m), Lian Beng is the most undervalued, trading at 3.9x PER, below Lum Chang and Tiong Seng at 6.3x and the sector’s average of 5.0x. Lian Beng has proposed a dividend of 1.6 cents, implying an attractive yield of 4.6%.

Action & Recommendation

We reinitiate coverage on Lian Beng Group with a BUY recommendation and target price of $0.62, based on 6x FY May12 PER.