Tiong Seng – Sitting pretty on S$1.47b order books

Tiong Seng has come a long way since its inception in 1959, more than five decades ago, when Mr Pek Ah Tuan and the late Mr Pay Seng Koon from Peck Tiong Choon Private Limited and the late Mr Lee Tuan Chay and Mr Khng Kwi Cher from Song Hup Seng Private Limited formed a partnership named “Tiong Seng”. Tiong Seng’s business was to provide excavation, earth moving and trucking services. Gradually, Tiong Seng business expanded and is now one of the largest building construction and civil engineering contractors in Singapore with an A1 grade. An A1 grade allows the company to bid for public sector construction projects with unlimited contract value.
Besides the construction business, Tiong Seng has another significant division which is the property development division focusing on developing residential and commercial projects in various second- and third-tier cities in the PRC.
Some interesting points
1.     Order book of S$1.47b, one of the largest if not the largest among listed peers
As of 25 Mar 2013, Tiong Seng has an order book of S$1.47b. The bulk of the order books will be recognized in 12-30 months which should ensure earnings visibility over the next couple of years. Based on Table 1 below, Building Construction Authority (“BCA”) estimates the total construction demand in 2013 will range from S$26-32b. (2012: S$28.1b). As Tiong Seng is one of the largest players, if not the largest among its listed peers in Singapore’s construction industry, the stable / bullish BCA outlook bodes well for Tiong Seng.
Table 1: BCA outlook
Years
Total construction demand
2012
S$28.1b
2013
S$26-32b
2014-2015
S$20-28b
Source: BCA, company
2.     Property development sales to be the kicker
With reference to Table 2 below, the revenue from sales of development properties was about S$3.3m in FY12. According to their 4QFY12 results, the revenue of S$3.3m was contributed from sale of 1 unit totaling 84 sqm in Wenchang Broadway in Yangzhou and 4 units totaling 681 sqm in Tianmen Jinwan Building in Tianjin.
As at 31 December 2012, Tiong Seng has sold the remaining 1 unit, totaling 141 sqm of Tianmen Jinwan Building, 275 units, totaling 32,507 sqm of Sunny International Project and 4 units, totaling 239 sqm of Wenchang Broadway in Yangzhou. These were not recognized in FY2012 revenue yet, in accordance with their revenue recognition policy. Based simply on such sales, it is likely that FY13F revenue from sale of development properties should exceed that of FY12.
Table 2: Company financials breakdown
Source: Company
3.     Potential cost savings from future loan refinancing
With reference to Table 3 below, Tiong Seng has a secured RMB loan from financial institution of SGD equivalent 53.2m which expires on 5 Aug 2014. (The initial maturity date was in 2013 but Tiong Seng has renewed the loan after year end.) With the high interest 10-15% that it is paying for the RMB loan, there seems to be scope of potential interest savings upon renewal or refinancing of the loan.
Table 3: Potential interest savings from refinancing
Source: Company AR2012
4.     Steady dividend of $0.01 since listing; XD on 6 May
Since listing on 16 Apr 2010, Tiong Seng has been giving S$0.01 dividend per share each year. Based on Tues closing price of $0.265, this works out to be 3.8%, one of the highest among listed peers. It is going to ex dividend on 6 May, Mon.
5.     Maiden steps into Myanmar
On 22 Apr 2013, Tiong Seng announced that they have signed an MOU with Shwe Taung Development Co., Ltd, one of the leading corporations in Myanmar with exposure in diverse industries such as real estate, construction, engineering etc to explore entering into a joint venture to set up a pre cast plant in Myanmar. According to the Myanmar Ministry of Construction, Myanmar plans to build more than a million houses over the next two decades. This is likely to bode well to Tiong Seng’s potential joint venture in the long term as residential construction accounts for about 51% or US$1.5b of Myanmar’s total construction output.
Noteworthy points
1.     Lumpy results
This is widely seen in construction companies. Quarterly results are difficult to forecast with accuracy as revenue can swing quite significantly in accordance to their revenue recognition policies. Nevertheless, FY13F is likely to be a stronger year VS FY12 due in part to the sales contribution from their development properties in China.
2.     Construction business – tough business to be excited about
The construction business is not exactly the most sexy story to be excited about due to lumpy results, low margins, stiff competition and escalating costs etc. Notwithstanding this, it is noteworthy that Tiong Seng has executed several high tech initiatives which reduce their reliance on labour relative to their peers. For example, Tiong Seng possesses the ability to design, produce and install pre-cast components. This is unlike most other contractors who buy straight from pre-cast producers. According to management, such measures result in about 20% cost saving in manpower requirements. As Singapore’s foreign worker levy is expected to increase from $350 to $450 in July this year, it is likely that Tiong Seng’s competitive advantage will be more apparent this year vis-à-vis their peers.
3.     Valuations are not extremely cheap
Based on Table 4 below, Tiong Seng’s valuations of 8x FY13F PE and 0.9x FY12 P/BV are not exactly cheap but quite reasonable in view of the above mentioned points and relative to their peers.
Table 4: Tiong Seng vis-à-vis its peers
Price
Div Yield
FY12 P/BV
FY13F PE
Tiong Seng
0.265
3.8%
0.9
8.0
Lian Beng
0.520
1.9%
1.1
6.9
KSH
0.475
3.8%
1.2
6.6
TA Corp
0.405
3.2%
0.9
NA
Ave excluding Tiong Seng
3.0%
1.1
6.8
Source: Bloomberg (30 Apr 13)
4.     Rather illiquid stock with average 30D volume at 1.16m shares
Tiong Seng’s free float is only about 20.8% as the top 20 shareholders own 79.2% of Tiong Seng (See
Table 5). As a result, Tiong Seng is rather illiquid with average 30D volume amounting to about 1.16m shares only. In my opinion, an illiquid stock is a double edge sword. If there is sudden positive news, it may be arguably easy for the share price to move higher as the supply of shares in the market is not large. However, it is noteworthy that the converse is also true. (i.e. if there is negative news and the share price plunges, investors may find it difficult to unload their positions).
Table 5: Top 20 shareholders own 79% of Tiong Seng
Source: Company AR2012
5.     Not extensively covered by analysts
DBS Research seems to be the only research house covering Tiong Seng with a target price of $0.330. With such scant coverage, it is likely that the investment community is still not familiar with its business and prospects. Therefore, it may take some time for Mr Market to understand it. Conversely, investors who understand and believe Tiong Seng prospects now can purchase it with a considerable margin of safety. On the investor relation aspect, Tiong Seng has recently appointed Financial PR as their investor relation firm to connect with the investment community.
Conclusion – Execution is key for potential re-rating
Investors would be watching Tiong Seng results in the coming quarters, coupled with any new contract wins to replenish their order books. In a nutshell, execution is key for potential re-rating.
Readers who are interested should check out Tiong Seng’s website http://www.tiongseng.com.sg/com_bizoverview.html & http://investors.tiongseng.com.sg/downloads.cfm for more information and analyst reports. You can also email me at crclk@yahoo.com.sg for the analyst reports and my writeup in pdf with tables and Tiong Seng chart attached.
*This is an amended version which I have sent out to my clients on 26 Apr 13.
Disclaimer
The information contained herein is the writer’s personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied.  In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

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