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.
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