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Tuesday, June 05, 2007

Tiong Woon @ 88 cts ( Cranes / Singapore ) 7 comments

Final Poll Results: 30:14

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Main issues

1. Historical margins and high valuations suggest little further upside

2. Unconvincing track record

3. Incongruous expansion strategy

I have been bullish on the infrastructure sector for a long time now ("Infrastructure boom"), and the current optimism on construction stocks has vindicated my views. In light of the ongoing regionwide infrastructure boom, why a bearish call on Tiong Woon?

This is not because of a pessimistic outlook on the sector per se; the benign outlook on infrastructure and construction in Asia remains intact. It is more of a valuation call, reflecting my view that at current price, upside may be limited.

After a long 2-3 year lull period over which the company's share price has languished in the region of 20-30 cents, the stock has broken out this year and now trades at three times its previous trading range. It has coincided with a market-wide revaluation, compounded with current bullishness over construction-related stocks. Its 1H07 pre-tax profits were double that of the previous year's, and together with several recent initiatives including setting up of their Saudi Arabian operations and proposed acquisition of a tower crane company, fuelled further market optimism on the company's prospects.

Assuming the excellent 1H07 results are sustained into the second half, Tiong Woon should report about $17-18M pre-tax profits for the whole of FY07. This is reasonable because the company achieved ~$8M pre-tax profit for 2H06 and $8.8M for 1H07, exhibiting a reasonable trend over two half-years in what I would see as a non-seasonal industry. Based on $18M pre-tax profit taxed at 20% (the effective rate actually varies, but I use an average based on previous trends) it works out to 20X PE for FY07 based on current market price of 88 cents. Hardly cheap since such a valuation is comparable to market leader Tat Hong, roughly four times its size.

It is always difficult to value a stock which seems to have excellent prospects whose cashflows are yet difficult to ascertain. That is partly the reason why such stocks are typically well-traded; because you have equal numbers of people sanguine about its prospects and those unsure about its high valuation; high uncertainty brings high liquidity. For asset owners like Tiong Woon which basically are dependent on asset demand and prices, perhaps a good performance measure is the return on asset (ROA) ratio and a useful way to get a perspective is to look at the historical evolution of this ratio.

The figures suggest that it might be difficult to advance too far from the 10-11% pre-tax ROA peak achieved within the last 7-8 years. Some might argue that we are seeing a new paradigm given the lack of construction capacity, but I say, what's the further upside? Tat Hong has guided for a 10% rise in rental prices over the next year, which may be seen as an industry projection. That may be taken as a profit growth of 20-30% over the next 1-2 years as the industry supply bottleneck works itself out, before demand wanes and tight supply of construction equipment eases.

But Tiong Woon's valuation seems to have priced in all the upside but little downside. It is worth pointing out that the abovementioned profit growth is by no means guaranteed, looking at the company's track record: although profitable, it has been unable to grow profits significantly in FY04-06 amid an infrastructure boom from which rival Tat Hong was able to benefit. Investors will remember late 2003 when the stock was ramped up to nearly 70 cents on hopes of mega-contracts from an oil-and-gas consortium it formed to explore opportunities in Russia; in the end hopes came to nought and prices went back the way they came. The episode illustrated how easily the stock could be ramped up (it was Commerzbank that was accummulating back then) and how easily it could collapse when expectations were not met. To me, for the present, it is especially incongruous that for a company of its small size, Tiong Woon is chasing contracts around the world (wind farms in China, crane transportation to West Africa, new ventures in Saudi Arabia) when the boom is right here in Singapore (to those who think it will feature strongly in the IR construction, I say it's more dream than reality). The pushers are now JP Morgan and some French bank (Credit Agricole). Let's see how things develop.

I agree that Tiong Woon is a hot-stock-not: Agree/Disagree




Anonymous laona said...

danielxx. i tink u are nt understanding the cranes market. really. construction need cranes definitely. with china booming and singapore ir and even shell and mobil expansion. buildings and plants still needed. and cranes is at first not their core business. their core at first is actually transportation in oil and gas and marine industry. given the newly acquire of duglas at 6.6mil only. it is moving in the right way. with the mind set of integration, one stop services of constructing and transporting and supporting. so i disagree of ur wordings. Tiong Woon Oil & Gas Services Pte Ltd, a subsidiary of Tiong Woon Corporation has established Steel Fabrication and Shipyard Facilities in Singapore and Bintan, Indonesia.

Our key business focus is in:
1) Offshore Platforms
2) Shipyard – Ship and Rig Repair Services
3) FPSO Topside Facilities
4) Steel Fabrication Modules

they have many proven tracks of record also. given short term target $1.02

6/08/2007 4:00 PM  
Blogger DanielXX said...

Hi laona,
Thanks for your comment. You have to understand that I have no issue with the medium-term prospects of the industry. The problem is with TW's stock valuation. Future developments might well justify its valuation and further propel upward re-rating, but investing/trading is about an assessment of the odds involved, and my (subjective) judgment is that there is more downside than upside. Note that my coverage is typically for the medium term of 3-6 months, so judge me by that. I brought up Tiong Woon's track record, both operationally and market-wise, to support my views. That is the potential downside that I'm trying to illustrate, because everybody knows the upside.


6/08/2007 5:24 PM  
Blogger tc said...

Thanks for pointing out the possible downside. Have taken profit on Fri...

6/09/2007 12:04 PM  
Anonymous Anonymous said...

expecting more contracts flow. so still believe upside will go with potential. first target 0.965. anyway. u are very informative in indexes. job well done.

6/09/2007 5:10 PM  
Blogger DanielXX said...

Let's see how the market prices it. It is difficult to quantify the profit impact from the recent deals secured (eg. China wind farms) and I have just used a crude method based on my reading of its asset-heavy business. The FY results coming up in 2 months time will be illuminating. Useful to watch the price action leading up to the FY announcement.

6/10/2007 10:52 AM  
Anonymous laona said...

no worry danielxx. go read more on the industry. the rental are very high rates. the less qty of the crane model the more higher returns it will be. u should study more on economics especially monopolistic compeition. ah tiong gt sm of these model . a fleet of 200+ cranes after douglas acquisition. results will be at least 60% higher given higher revenue and margin.

6/12/2007 7:01 PM  
Anonymous nge said...

Thanks for yr research, it's a good thing for long-term investor like me. Now, when looking back, I think yr worries are very correct. I buy you and didn't lose $$...
However, at current levels, has it become attractive again? It has pretty low dividend yield but hey, so is the $$ sitting in the bank(losing value due to inflation).

6/02/2010 11:07 PM  

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