SINGAPORE (Feb 21): A Bloomberg columnist says it succinctly. “The novel coronavirus Covid-19 causes flu-like symptoms in its patients. For the rest of us, it induces a kind of creeping cluelessness.”
Whether Covid-19 last weeks, or months, flu economics is flourishing, assessing the impact of Covid-19 on economies, commodities, markets, stocks and valuations. How will it impact China, Asian economies, sectors such as tourism, semiconductors, electric vehicles, property and construction? Will the global economy suffer a contagion? Or will Covid-19, as optimists believe, just blow over and will markets rebound swiftly?
We do not know. According to the World Bank, a pandemic like the Spanish Flu (1918- 1919) would have cut GDP by 4.8%. The 1957 Asian Flu if it materialised now would cut global GDP by 2%.
The Singapore government has unleashed the largest stimulus since the global financial crisis in its 2020 Budget to battle Covid-19. Yet, the GDP forecast downgrade from the Ministry of Trade and Industry (MTI) reflects a weakened outlook, particularly for the manufacturing sector.
However, MTI also indicated that the construction sector is projected to post steady growth, from its rebound since 2018 – and will contribute positively to the strength of the Singapore economy. Earlier this year, the Building and Construction Authority (BCA) projected the total construction demand to remain strong with sustained public sector construction demand, which will make up about 60% of the projected demand for 2020.
Given this macroeconomic setting and sector outlook, we believe that one of Singapore’s major home-grown construction companies, and SGX-listed Lian Beng Group looks attractive at its current valuation with improving prospects based on its order book of $1.7 billion as at Dec 27, 2019, up 26.5% y-o-y.
Lian Beng is a Singapore-based construction company that does the construction of residential, industrial, commercial and civil engineering projects as a main contractor for both the private and public sector. Lian Beng also sells, leases, maintains construction machinery and equipment; develops and invests in properties; and most recently ventured into a fund management business through its property development subsidiary.
Its 75% owned subsidiary SLB Development was spun off and listed on the Singapore Exchange Catalist Board in 2018. Lian Beng is a relatively small company with a market capitalisation of $270 million, and subsidiary SLB is less than half its size at a mere $120 million market cap.
Due to its small size, it does not attract analyst coverage, though SLB has very limited coverage. In terms of trading liquidity, Lian Beng’s trading volume and liquidity is mediocre, but sufficient. SLB on the other hand is rather illiquid, given its low public free-float. Further, Lian Beng’s earnings are lumpy from quarter to quarter from its main construction segment, which make up more than three quarters of revenue.
All these factors and characteristics collectively present an opportunity for investors because it is seemingly hard to value a company like LBG. This implies that there is a high likelihood for the company’s share price to not accurately reflect its financials, fundamentals, and prospects; and its stock might very well be undervalued. The focus will be on Lian Beng, given SLB’s limited financial data and underwhelming trading liquidity – which are very practical concerns for investors.
Strong fundamentals not reflected in share price
Lian Beng’s historical fundamental growth, reflected by the growth in its revenue, earnings, retained earnings, operating cash flow and free cash flow (collectively the weighted value growth) appears to be much higher than its price growth across most periods, which is a positive sign. Chart 1 illustrates this, and implies that LBG is undervalued.
Yields-wise, Lian Beng’s fundamental yields dwarf the risk-free rate (Singapore 10-year government bond yield), as shown in Chart 2. Not only that, the dividend yield, which represent the passive income component of investments, is a lucrative 4.4%. Compared to its regional and domestic peers, Lian Beng is on average cheaper and relatively more attractive, as shown in Chart 3.
Arguably, the most convincing investment feature of Lian Beng is its balance sheet. Lian Beng has a current ratio of 1.46 times, net gearing of 50.2% and interest cover of 3.46, which puts it in a comfortable spot in terms of liquidity and solvency. It also has a substantial $1.65 for its NAV per share, which is 3 times more than its current price of $0.51, and even after discounting its assets substantially, it works out to be $1.11, which is still more than twice the trading price. Further, the inventory to cash days of Lian Beng has consistently and significantly improved over the past 12 quarters, falling from over 410 days to just 130 days as of the most recent quarter; representing better cash management from the company.
On the same note, however, it appears that Lian Beng’s margins have been quite erratic for the past 20 quarters, given the lumpy contribution from the property development segment. To address this matter, SLB, which is LBG’s subsidiary, has diversified into the fund management industry, where it hopes to generate recurring income to smoothen out its otherwise lumpy earnings from property development. Also, given the prospective industry outlook for construction, it should be more than enough to compensate, given Lian Beng can leverage its solid track record and proven expertise to tender actively for public and private sector projects. More importantly, its competitive advantage lies in the fact that Lian Beng is a BCA Grade A1 contractor in General Building, which means it is able to tender for public sector building projects of unlimited contract value. From the latest financial year ended FY2019, Lian Beng had an order book of around $1.4 billion which should contribute to revenue through FY2022. Since the start of 2020, Lian Beng has already secured a total of $693 million worth of contracts, raising its order book to roughly $1.7 billion, which should support it through FY2023.
Surge in net income, family raises stake
Another near-term share price catalyst is based off its latest announcement on the disposal of one of its non-core subsidiaries, which should bring in $9.4 million – translating to almost 84% of the latest quarter’s net income. Over the next few quarters, the share price has good potential to adjust to better reflect the company’s performance, because one of the main reasons the share price dwindled from 2018 is due to the adoption of SFRS accounting in FY2019. To illustrate this point, LBG’s revenue would have more than doubled to $577.9 million in FY2019, from $243.9 million in FY2018 if not for the adoption of SFRS. Profit attributable to shareholders would also have risen 12.9% to $61.4 million in FY2019, from $54.4 million in FY2018.
The controlling shareholders and founding Ong family have also been accumulating shares of Lian Beng since the start of the month, and have been doing so since 2019. This could indicate that the management feels the company is cheap and undervalued – (see Insider Moves this week). Our in-house adjusted sum-of-the-parts valuation (see Table 1) projects a fair value of $0.68 for Lian Beng – which is 33.3% above its current trading price of $0.51.