How Singapore's Reopening to Foreign Workers will Benefit Companies

On Friday, the government made an announcement of re-opening borders to vaccinated foreign workers from most countries.

This is an important moment for many companies here because they are reliant on foreign manpower which in turn reduces their cost. Furthermore with India case counts falling and is being vaccinated with COVIDshield (developed by AstraZeneca), further relaxation of border measures for vaccinated travelers may happen soon.

Key Beneficiary

Construction companies like KSH holdings, Hock lian seng, TTJ holdings are bound to benefit from this. For example KSH holdings has a larger orderbook in the private sector market (which means many of their projects are not considered critical infrastructure which were exempted from border measures); with the lifting of borders, they will be able to tap on more sources of foreign workers for their projects. A lower manpower cost will improve profit margins.

Due to the recent border measures, companies like KSH had impaired for expected cost increases in its current projects and recognised them as losses beforehand. However, the reopening of borders may mean that such impairment will not occur and becomes a gain.

All in all, I am re-evaluating the construction industry. The recent measures is going to result in earnings expansion and with the government needing to prime pump the economy, more projects will come in. The increase in revenue and improvement in profit margins may just be what makes it ripe for construction companies to experience a share price re-rating.

<Not vested in any of the mentioned counters yet>

Selling of Global Invacom and searching for other turnaround companies

<A short post update due to G Invacom recent update on 4 Aug>

Due to the latest profit warning which shows that 1H 2021 is not doing well, I have sold off G Invacom at a price of 11.7 cents.

This is due to my previous investing thesis not being met where I expected a turnaround in earnings which didn't happen and the company is trying to restructure in order to reduce cost.

Searching for other Turnarounds

With the markets now at their highs and COVID situation has started to improve (except for SEA), it is time to source for other companies who have a potential turnaround in earnings.

Wei Yuan Holdings- Potential Turnaround in Profits

While listed in the Hong Kong Exchange (Stock Code:1343), Wei Yuan is a Singapore business who operates in the cable installations for power grid and telecommunication companies in Singapore. They also have a minor business segment in road surfacing. Their geographical business is in Singapore and are in the civil engineering industry.

The company is a mid tier in the civil engineering segment of Singapore holding a 5.7% market share based on its IPO prospectus. 

Observations on Profits

Looking through the company's FY20 profits, it can be seen how Singapore's covid measures have affected its profitability and operations.

During the first half of 2020, Singapore issued a stop work order in a bid to stem the covid spread among foreign workers, as a result, Wei Yuan registered a loss of $4.5million on the back of $23 million revenue. However, as Singapore re-opened in the second half of 2020, they registered a profit of $1.2million on the back of $34 million in revenue.

What do I expect for 2021

First off we have to explain what happened in Singapore for 2021. For the first 4 months, thing went as per normal. However in May 2021, Singapore severely restricted the travel movement of countries which we were relied on for foreign labor. Hence, I expect the company to report the same profit of $1.2 million for the first half

As Wei Yuan projects run roughly 2 years in duration, I expect the company to be hit by labor cost over run for the remaining of FY21 and FY 22. After this, the company should start turning profitable again. 

Track Record of Company Tender

Based on its IPO prospectus, the company has been able to sustain a good profit from its contracts. This shows the tendering team has placed in adequate buffer in case of cost overrun. This is a good sign as there are some civil engineering companies in Singapore (think Yongnam) whose projects have always been loss making over the past years, likely due to poor projections by the tendering team. The companies with good tendering track record, I have encountered thus far is TTJ holdings and perhaps Wei Yuan (if they maintain their record)

Valuation

In my view, the company is likely to register a $1.2million profit for 1HFY2021. This is because it enjoyed 4 months of unrestricted access to labor as well as a good domestic situation of COVID handling. Furthermore, the construction industry grew during the 1Q of 2021. For the remaining half, it is likely to be loss making, but Wei Yuan should still be able to turn in a small profit due to its good track record in tendering. Hence for FY2021, I expect the company to fully turnaround in profits with a $1.0 million profit.

Post 2022, profits should return to pre-COVID levels of $5 - $8 million. The closest comparable to Wei Yuan is TTJ holdings (though they do different civil engineering types). TTJ is trading at 14-18 times P/E on forward earnings. Wei Yuan holdings is of a similar size company to TTJ and has a slightly higher revenue base; hence I have estimated Wei Yuan to be in the value of forward 16 times P/E.

Hence, Wei Yuan will then be priced as a $80-$110 million company on the HK Exchange (TTJ market cap is s$63 million). At current SGD/HKD exchange rate, the market cap of Wei Yuan should be HK$460-HK$632 million.