Review of Yongnam's 2014 Q2 and half yearly financial result

This posts came a little late. The financial report was out on 6th August but i'm only writing on it now. But anyway, Yongnam is still one of my investments till now. The motivation behind the investment in Yongnam was due to the positive outlook of more construction projects in Singapore. As Singapore grows, our infrastructure could not keep up with the growing population. As such, the government has embark on new construction projects such as the new MRT lines, many new residential and commercial buildings, building of new expressways such as the MCE and also plans for the fourth and fifth terminal for Changi Airport.

Yongnam has a good track record in winning key construction projects. They were previously involved in projects such as the circle line, the KPE, National library building, Suntec city, Changi Airport terminal 1 etc. The recent projects were the new sports hub which was just completed earlier this year, new downtown line and also the new Changi Airport terminal 4. They are also involve in overseas projects such as the Hong Kong MRT, KLIA airport and also Brunei and Bangkok international airport. Currently, they are also bidding for the project for the construction of Hanthawaddy International airport in Myanmar.

Yongnam has good track records of profits. For the past 5 years from year 2008, profits have been steadily increasing up till 2011. From year 2012, profits started to decrease to a low of only 5.5 Million in 2013.

However, Yongnam reported a second consecutive loss this quarter. This increased the loss for the half year of 2014 to 7.17 Million. This was attributed to lower revenues and also lower gross margins. With lower gross margins, this means that cost of construction materials may have gone up and cost of labour may also have gone up. This would be true for the increase in labour cost as the government tighten their foreign manpower policies. To counter this, Yongnam stated that they will focus on high yield projects and maintain its resources in anticipation of winning more projects in the second half of 2014. Whether or not they can achieve what they set out for, we'll have to see the results by the end of this year. But, do bear in mind that the loss which Yongnam reported is actually not a real loss. Depreciation is already 13.71 Million which is not a real loss which is incurred.

This explains even though Yongnam reported a loss, cash flow from operations remain healthy and increased 8.9 Million for the half year 2014. This was in fact higher than in 2013 which is good news. The increase in cash flow is due to the trade receivables which is the payment that they receive for previous projects owed to them. Gearing is at 0.59 times which is healthy for the construction sector. Net asset value per share is 23.78 cents which means the current price at 22 cents is slightly below fair value.

For Yongnam, the investment will still be good only if they are able to turn around by the end of 2014. For now, the risk for investing in Yongnam is high bearing in mind the uncertainty. I have adjusted my portfolio to take into consideration the risk so that it does not constitute too big a portion of my overall investment portfolio.

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Related Posts:
1. Yongnam reports a marginal loss of S$1.9 Million in 1QFY2014
2. Yongnam secures subcontract for construction at Changi Airport Terminal 4