Yongnam Holdings profit down 20% to $12M

Engineering and construction firm falters amid slowing revenue recognition and shrinking margins.

Yongnam Holdings needs to pick up the pace on its order wins, according to DBS, if it hopes to turn around its increasingly sluggish earnings.

Here's more from DBS:

Another disappointing quarter. 2Q12 net profit of S$12m (down 20% y-o-y) was disappointing, owing to a combination of slow revenue recognition from key projects and lower-than-expected margins. 1H12 revenues and net profit of S$145m/ S$23.5m had accounted for only 42%/ 38% of our existing full-year estimates. We believe key structural steel (SS) projects like National Art Gallery and Singapore Sports Hub are ramping up slower than expected, leading to lower revenues. Overall gross margins had declined by from 29.6% in 2Q12 and 29.3% in 1Q12 to 26.3% in 2Q12, as many of the higher-margin iconic developments like Gardens by the Bay and Vista Exchange at One North had already been completed last year.

Order wins pace not exciting enough. Yongnam has won an estimated S$140m worth of contracts (including variation orders) YTD FY12, but with the pace of new orders being slower than we had earlier estimated, we have lowered our FY12 new order win assumptions to S$300m from S$370m earlier. Management has not been bidding for some of the Downtown Line 3 parcels, as the strutting market is too competitive in Singapore and margins are thinner than for previous MRT contracts. Thus, while the current order book is still robust at S$475m, the pace of the order book accumulation may moderate, going forward, with more focus on securing lucrative overseas contracts.

FY11 earnings peak will be difficult to match. In line with slower revenue recognition and lower margins assumptions, we cut our FY12/13 earnings estimates by 26%/ 17% respectively. Dividends may also be cut this year due to lower earnings and a weaker balance sheet.