Construction GDP YoY change (RHS) Source: CEIC, Credit Suisse estimates

Construction GDP YoY change (RHS) Source: CEIC, Credit Suisse estimates.

• The earnings outlook and operational landscape for Singapore's construction sector has never looked more robust, in our view. Regardless of the macro overlay, the reality is that the infrastructure story is very much intact, and we believe construction names should remain on the radar of the Singapore market over the next 12-18 months.

• Although we maintain that the overall earnings outlook for the sector remains strong, we believe that players firmly-positioned on the supplier side of the value chain, as well as the specialist contractors, are most resilient to earnings risks, and are best able to witness both strong top line and margin expansion over the next 12-18 months, against a backdrop of strong demand growth and supply constraints.

• We are expanding coverage of the Singapore construction sector. We initiate coverage of Tiong Woon (TWC SP) and Yongnam (YNH SP) with OUTPERFORM ratings. We reiterate our OUTPERFORM rating for Hong Leong Asia (HLA SP). We have raised our earnings forecasts for Tat Hong (TAT SP) by 4-12%, but keep our rating at NEUTRAL given the limited upside.

Yongnam (YNAM.SI, S$0.40, O, TP S$0.50) – Steel-reinforced growth

• We initiate coverage of Yongnam, with an OUTPERFORM rating, and a target price of S$0.50, implying 25% upside.

• Yongnam is the leader for structural steelworks and strutting equipment, with its closest competitor, at only a fifth of its size. Recently-acquired capacities (up two-thirds in FY08E) should drive growth, while earnings are boosted by operating leverage on strutting assets accumulated in the previous cycle.

• We believe Yongnam should be able to bag a large portion of the high-profile contracts handed out in the coming months, given both its operational scale, and industry supply constraints, with earnings almost tripling in FY07E and FY08E.

• Our S$0.50 price target is based on 15x FY08 P/E, in line with other Singapore construction companies, checked against our DCF valuation, on 9.9% WACC and 3% terminal growth rate.

• Key risks are economic downturn which may curb construction spending, execution risks given tight project schedules and capacity, default of main contractors, and industry concentration.

Tiong Woon Corp. (TION.SI, S$1.08,O, TP S$1.40)

Emerging heavyweight

• We initiate coverage of Tiong Woon with a 12-month target price of S$1.40 and an OUTPERFORM rating, implying 33% upside.

• Tiong Woon’s heavy lift and haulage segment, with a niche in heavy tonnage (>1000 tonnes) is its core business, and remains a significant earnings driver going forward, on higher utilisation rates, coupled with stronger rental yields.

• Tiong Woon’s recently-acquired 64-hectare fabrication yard in Bintan (Indonesia) for offshore production facilities has won its maiden project early this year. We expect order momentum to pick up, with margins improving due to scale, and increased efficiencies. We forecast earnings CAGR of 23% through FY10E.

• Our DCF valuation methodology is on WACC of 10.2%, and a terminal growth rate of 3%, implying an end-2008 P/E of 15x, undemanding given the strong underlying earnings profile.

• Key risks are economic downturn curbing construction spending, execution risks given tight project schedules, default of main contractors, regulatory changes, and industry concentration.


Hong Leong Asia (HLAA.SI, S$3.58, O, TP S$4.65) – Into the upswing

• We reiterate our OUTPERFORM rating for Hong Leong Asia (HLA), and sum-of-parts based target price of S$4.65.

• HLA’s building materials unit - once the group’s core business before a slump in Singapore’s construction industry drove the company to expand into China many years ago - remains best leveraged to a strong sector recovery, given its control over the largest granite quarry in Southeast Asia.

• HLA’s recently-inked contract with the Marina Sands IR to be the exclusive supplier of concrete is a job for 800,000 cu m, with the cost-plus contract effectively guaranteeing profits. We forecast a 24% revenue CAGR for this division, including the contribution from 32%-owned associate Tasek Corp., which should drive a 65% earnings CAGR for HLA through FY09E.

• HLA’s building materials division should contribute 48% of total net profit in FY07E, and look set to rise even further through FY09E, offering one of the most undervalued plays into Singapore’s strong construction theme. Key risks are economic downturn which may curb construction spending, execution risks given tight project schedules and capacity, default of main contractors, and industry concentration.


Tat Hong Holdings (TAT.SI, S$2.15, N, TP S$2.20) – For the long haul

• We have raised our earnings forecasts for Tat Hong by 4 -12% through FY10E, and our DCF-based target price from S$2.20 to S$2.35. The implied upside justifies a NEUTRAL rating for now.

• The volume of major infrastructure and oil & gas projects planned, coupled with the lead time and capital requirements for new crane deliveries, suggests that rates will continue to rise and flow through to Tat Hong’s earnings for several years to come.

• Our forecasts have been raised on stronger margin assumptions for the crane rental business, as we believe the market has not factored in the tightness in the market, a position in which Tat Hong remains the global leader in terms of aggregate tonnage. We now see 3-year earnings CAGR of 26% through FY10E.

• We assume a WACC of 9.6%, and a terminal growth rate of 2%. This implies an end-2008 P/E of 15x.

• Key risks are economic downturn curbing construction spending, execution risks given tight project schedules, default of main contractors, regulatory changes, and industry concentration.