Yongnam - Weaken Balance Sheet with risk of default

Yongnam has released its latest full year results and it looks pretty scary. Unlike its competitor TTJ who has been eking out a margin in projects, Yongnam continues its path of losses. Despite government financial assistance for the construction sector, the margins earned are  negative and even on a gross profit view, it is not even making money. TTJ, Hocklianseng, KSH are profitable in their construction segments.

It points to reckless bidding by its tendering team. My speculation is for projects, they are bidding as the lowest bidder, without care for margins and people are accepting their bid because of their lowest value and track record of completing many national projects. However, the risk of them ending like Greatearth is now elevated. The public sector should keep watch for their projects with them in least it becomes like some recent BTO projects

Weak Balance Sheet

PPE Woes- The company is reporting positive NAV due to the presence of reported $215 million in PPE. This consists of steel strutting structure ($155 out of $215 mil). However, I do not think this is the true cost. In this latest FY, Yongnam has sold off steel beams (nett of depreciation) earning a cash proceeds of $22 million, however, it impaired $7.5 million as part of the sale. This indicates a possible impairment of 25% for its steel beams and columns (currently valued at $155 million)

Convertible Bonds- Yongnam has 9 million in convertible bonds due at an exercise price of 5 cents. Given its poor results and that share prices are below 5 cents, it is likely bondholders will ask for cash redemption. Yongnam currently is in a cash crunch and bondholders will likely levy for a higher interest more than the 7% or a severe dilution in shares such that their loss in principal is minimal.

October 2022 will be a crunch time.

How can Yongnam Turn Things Around?

Simply put the tendering team have to be more prudent. The way they are bidding as the lowest value candidate has caused the company to bleed for years. They cannot continue this and will have to increase their construction tender values. No doubt they will lose projects but it ensures the company becomes profitable and shareholders value are preserved.

The current management seems reckless thinking they can act like a tech start up who can burn money to grow market share in Singapore. This will not happen because locally their competitor TTJ holdings will survive due to its prudent nature. TTJ can cede market share but it will not exit Singapore because it is earning money from projects. Other foreign companies are in similar predicament as TTJ.

Starhub FY2021- Not Great and a Stagnating Company

Starhub has released its FY 2021 results, revenue drop with slight dip in profit. Dividends totaled 6.4 cents for the year

Takeaways

Mobile ARPU is still declining (from $31 per user to $28 per user)

Broadband ARPU has grown from $29 to $32 and with that the segment's revenue has increased.

Borrowings has grown further by $200 million due to issuance of new bonds.

Outlook

With the re-opening of borders, it is likely Starhub's mobile revenue will buck its downward trend as tourism and more foreign workers will mean an increase in prepaid users. However, in the postpaid market, the existence of Myrepublic and Circles life will continue to pressure its postpaid ARPU.

All in all, I expect Starhub to grow its overall revenue slightly, however it will be negated by the growing interest expense from its ballooning debts. So dividends are likely to maintain at 6.4-6.8 cents region. My worry I also have is the declining population base of Singapore, mobile penetration is already high and unless Singapore imports more foreigners, the number of postpaid users in this country will decrease and this will affect Starhub's mobile revenue.

The 2021 10 year bond Starhub (2.48%) issued was of a low rate and the proceeds are likely kept to redeem bonds maturing from 2022. With the interest rate hike environment, it is unlikely Starhub will turn to bond raising. This means dividends will be capped and those holding perpetual shares, the redemption looks very slim. This is because at a step up rate of 4.95%, it is more attractive for Starhub not to use the cash to redeem perpetuals but to pay off bond notes (which mature all the way to 2031). 

Given how the economy is weaker since my last writing in Feb 2020, instead of expecting Starhub to be a dividend yielder of 5%, one can expect it to be a 4.5% yielder instead. The world has to drain off the liquidity it had created during COVID and this will take about 5-6 years to clear. At a 6.4 cents dividend and expected yield of 4.5%, owning Starhub shares in the region of $1.40 is acceptable. 

But 5-6 years down the road, Starhub has to grow its dividends as the global economy would be better and QE tightening will be the theme, at my expectation of a 5% yielder the company is slightly overvalued