Advertisement

SI Research: Tiong Seng Holdings – Another 50 Percent This Year?

Government spending on public amenities projects contributes significantly to the construction industry as the government is after all, the sector’s biggest client. This year, the government will put aside $20 billion for infrastructure, $12.8 billion for education and $10.2 billion for healthcare expenditure. In all, the total spending by the ministries is expected to come in at $80 billion in 2018.

Recently, Tiong Seng Holdings (Tiong Seng) caught our attention after it secured two contracts from the Ministry of Education for the construction of two new primary schools worth a total of $103.8 million.

Over the past year, Tiong Seng’s shares gained over 50 percent to $0.40 as at 14 May 2018. This is not including the recent dividends of $0.015 per share, translating into a dividend yield of 3.8 percent. In comparison, the benchmark Straits Times Index gained approximately nine percent over the past year.

The Business

Founded in 1959, Tiong Seng has over 50 years of experience in civil engineering and infrastructure, having undertaken a wide range of public and private sector projects which were instrumental in the development of Singapore.

Apart from construction, the group has also diversified into property development in China, focusing on commercial and residential projects in the second and third-tier cities such as Tianjin, Suzhou and Yongzhou.

Tiong Seng also provides pre-fabrication solutions through its wholly-owned subsidiary, Robin Village Development, which is best known for its unconventional precast designs.

Financial Performance

Due to the nature of the construction business, revenue for certain projects could be recognised under the percentage-of-completion method. As a result, Tiong Seng’s revenue fluctuates and can sometimes be “chunky”.

Tiong Seng Pic 1
Tiong Seng Pic 1

The bright side for Tiong Seng is the visible improvement in net profit margin, which more than doubled from 1.8 percent in FY15 to 4.2 percent in FY17. The improvement was mainly attributed to the stronger profit margin achieved in the construction segment.

Placing much focus on innovation, Tiong Seng has been harnessing cutting-edge construction technologies in order to remain competitive in the current industry landscape.

Prefabricated Pre-finished Volumetric Construction

Tiong Seng takes pride in its prefabricated pre-finished volumetric construction (PPVC) capabilities, which supports the group’s design for manufacturing and assembly (DFMA) approach. The group recently completed the JTC Space @ Tuas project with the full implementation of its PPVC capabilities.

To further illustrate the benefits of PPVC, Tiong Seng, together with its joint venture partners, completed the Yuzana low-cost housing project in Myanmar within three months, saving construction time by around 40 percent. Conventional construction methods would have taken around six months to complete.

The significant improvement in productivity is also one of the main reasons the Singapore government is actively encouraging contractors to adopt the use of PPVC. Currently, almost half of government land sale sites mandate the use of PPVC. Going forward, the Housing and Development Board also plans to adopt the concrete PPVC method in 35 percent of its projects by 2019.

In addition, the government is expecting another 59 DFMA projects this year, on top of the current slate of 40 projects. Pushing for greater adoption, the government has set a target to achieve 40 percent of DFMA in the construction industry, up from the current 10 percent.

Valuations

Having gained 50 percent over the past year, could there be any more upside potential for Tiong Seng? Here are the valuations of some competitors in the civil engineering and infrastructure industry.

Tiong Seng Pic 2
Tiong Seng Pic 2

Amongst the three companies, Tiong Seng is currently valued at the lowest price-to-earnings ratio of 5.8 times, while trading at a 40 percent discount to book value. In terms of dividend yield, Tiong Seng at 3.8 percent falls slightly short of Lum Chang Holdings’ 4.1 percent.

While it is quite unlikely that Tiong Seng’s shares could add another 50 percent this year, its attractive valuations do provide some room for upside potential. The group’s current construction order book size of $594 million also provides earnings visibility extending into 2020.