Lian Beng stays strong with $839m worth of contracts until 2014

Strong order book with room for more
Capable in both private and public residential construction. Lian Beng has an impressive track record in both private and public segments of residential property construction. The company made its name as a Housing Development Board main contractor by 1993 and over the years, it has also gotten an array of private residential construction projects under its belt. If private construction demand falls significantly in an event of severe economic downturn, we believe Lian Beng's track record with HDB gives it an edge to weather such decline.

Current order book among strongest ever. The company has c.S$839m worth of ongoing contracts to complete till 1H14. This provides a strong foundation for management to work on. Its strong order book will give Lian Beng more leeway to selectively tender for projects, always keeping an eye on profitability. FY11's net margin is the highest in the company's history, and we believe it can remain fairly stable in the near term.

Broader revenue base complementary to construction. In addition to its booming construction business, Lian Beng grew its ready-mixed concrete business substantially in recent years and also participated in property development with a good degree of success. However, property development will be a secondary focus for Lian Beng in the near future, whereas the company will continue to expand its construction materials business. We like its expansion into construction materials as it offers the company self sufficiency and margins protection. Its concrete business has grown quickly in scale and Lian Beng is planning to spin it off for listing on the Taiwan Stock Exchange.

Initiate with BUY - Strong order book with room for more. We like Lian Beng for 1) their track record in both private residential and public housing construction projects; 2) its strong order book which gives management room to focus on winning contracts which are more margins accretive; and 3) its undemanding valuations against peers. The company trades below local construction peers' average P/E, despite recording one of the highest ROEs.

We believe Lian Beng is well positioned to win more projects in private residential space and a beneficiary of increased HDB supply. Therefore, we believe the discount on Lian Beng compared to peers is unwarranted. Applying a 5x forward P/E multiple to FY12F EPS, we derive a fair value estimate of S$0.52, implying c.52% upside; initiate with BUY.