Next Better Player

Margin of Safety suggested initiating a position in Lian Beng Group (LBG) in February 2012 at S$0.39 per share. LBG has since had a good run to S$0.515 (close of 11 May 2013). Whilst it is inexpensive from a PER perspective, it is now at a premium to its NAV of S$0.47 per share.

Looking ahead, LBG's recurring income will increase as its workers dormitory at Mandai fills up and it could still surprise with more construction contracts win. What we are uncomfortable about is its stakes in the property projects.  Whilst small by our sum of parts estimate to LBG, sentiment could weigh on the counter as we expect the Singapore residential market to weaken considerably from here for several years. Word on the possible spin off of its engineering and machinery division on the Taiwan Exchange has also gone cold.

Having rode out a total return of 37% (c. 32% capital gain + 5% dividend yield) in 15 months, we recommend switching into other construction counters to ride the development boom in Singapore.

Cash Laden with Catalyst

Lian Beng Group's results for the financial year ended 31 May 2012 were impressive. Its EPS rose to 9.8 cents from 9.1 cents. This was on the back of increasing its net profit margin from 9.6% to 11.6% yoy.


It also increased its dividend by 25% to 2 cents per share, from 1.6 cents. This outperformed our expectation of a base case dividend of 4.1%. Hence, investors who joined the register in February would be enjoying a yield of 5.3%. This hearty payout hardly makes a dent on its huge cash pile - approximately 40% of its current market capitalization is net cash!

Its construction order book of over $650 million remains full and is expected to keep the group busy until 2015. With the property and infrastructure projects still on track, Chairman Ong Pang Aik is keen to enhance share holder value further. In fact, Pang Aik's hard work thus far was recognised after being bestowed the award of "Best CEO" at the 2012 Singapore Corporate Awards (organised by The Business Times and supported by Singapore Exchange). The award was an affirmation of his leadership strategy, vision, execution abilities and the firm's corporate governance.

Since our call in February 2012 when it traded at S$0.39 a share, Lian Beng has only moved up marginally by 8% to S$0.42. In the near term, we expect LBG to trade at least to book value of S$0.44 a share. Further upside would come when it spins off the engineering and machinery division on the Taiwan Stock Exchange.

A steal at EV/EBITDA at less than 1x?

Lian Beng Group is a A1 grade general building and A2 grade civil engineering contractor listed on the Singapore Exchange. Its A1 certification implies that it is eligible to tender for contracts of all sizes in Singapore.

In recent years, Lian Beng had focused on private residential projects. In November 2011, it turned its sights back on the government market and won a S$13 million contract from the HDB. The contract in Tampines is expected to be completed by September 2013.

With 25,000 BTO flats which HDB has committed to pushing out in the next 12 months, we expect Lian Beng to continue to score its share of contract wins as the Group has over thirty years experience in building construction.

Competition in the sector is fierce but the firm managed an impressive net profit margin of 9.6% for FY2011. Its impressive order book which stands at S$772 million should keep the firm busy until 2014.

Lian Beng is aware of the need to build up a recurring income stream to cushion the volatility of contract work. Hence, it teamed up with Centurion to develop a foreign workers dormitory in Mandai. We project that the dormitory would be completed by June 2012 and can generate approximately S$11 million in rental income annually.

Valuation for the firm is very compelling. At S$0.39 per share, Lian Beng is trading at its book value despite boasting an impressive return of equity of 25%. On an EV/EBITDA basis, Lian Beng is trading at approximately 2x (FY2011) and 0.7x (FY2012F)!

About 44% of its market capitalization is net cash which stands at S$83 million. Hence, Lian Beng should have no issue paying out about paying out another 1.6 cents in dividends for every share at the end of FY2012. Hence, we are confident of a base case dividend of 4.1%.

Management which owns 25% of the firm is keen to unlock value for shareholders via a listing of ready mix concrete and engineering business on the Taiwan Stock Exchange. The exercise should release more cash back to Lian Beng and hopefully catalyze the stock to greater heights.

A Sound Investment (so far)

Soundwill Holdings, which was flagged out in June 2007 at HK4.40 per share, continues to scale the price chart as management unveils more value accretive initiatives. It closed today at HK13.60, which implies a gain of approximately 210% over the 3.8 years holding period, or about 50% per annum. To some extent, this pick has highlighted the importance of investing in companies with growing NAV per share.

The flagship property Soundwill Plaza remains nearly fully let in the prime Causeway Bay district. There was also positive rental growth of 9% yoy, bringing net income from the asset to HK$200 million. As we had flagged out earlier, Soundwill is developing another commercial building behind Soundwill Plaza at Tang Lung street. When completed in FY2013, rental income would likely be boosted by an additional HK$72 million. Including its property assembly / development business, Soundwill's fair value could be about HK$20.00.

When viewed in the context of the horrible global financial crisis which happened during our holding period, Soundwill has proven to be a performing and rewarding bet thus far.

On a rising tide

Jaya Holdings (S$0.63) was the subject of a takeover bid recently. We are of the view that it was a technical bid by the new controlling shareholder Cathay because it had to satisfy the rules of the Takeover Panel. As expected, the independent financial advisor Kim Eng had recommended minorities not to accept Cathay's offer. The takeover has since lapsed. As this poor sentiment dissipates, we expect the price of Jaya shares to quickly breach its book value of S$0.68 and next settle at least in the S$0.70s range. Following its restructuring, we have no issue with the fundamental prospects of the company and estimate its fair value to be substantially higher given the buoyant prospects of the oil and gas industry as well as the new builds in progress. Street estimates its RNAV to be north of S$1.00.

Show Me the Money

Asia Enterprise Holdings hit an intra day high of S$0.375 as excitement returned to the oil and gas sector. Despite its cash laden balance sheet, the stock closed at S$0.34, below its NAV. Our other recent name Selangor Properties also advanced to RM4.36 from RM4.20 as regional investors take note of the steep discount to NAV of RM5.11. Looking at how the counter is stirring, more upside could be in store.

Innotek which was flagged out a year ago at S$0.50 surged too. It closed at S$0.615. Note that management has consistently doled out a 5 cent per share dividend annually. Hence, it represents a capital gain of 23%. Given its 10% yield on cost, the total return over this 1 year holding period is approximately 33%. If Innotek maintains its cash horde and does not deploy into acquisitions, the current 8% yield is sustainable. Even at S$0.615 per share, it trades at a steep 28% discount to NAV (S$0.85). The upcoming annual general meeting would be held on 28 Apr 2011, where the dividend is likely to be ratified for a pay out in late May 2011. Expect shareholder approval for this sizable payout to bring about further interest in the name.

On the Right Track

Malaysians will readily tell you that one of the most prime plots of real estate in KL is in Damansara locality. The area has also received a further boost with the government's plans to put up a MRT line through the locality.

One of the prime beneficiaries of the above developments is Selangor Properties (SP), a sleepy KLSE listed company (current price of RM4.20) with a substantial land bank in Damasara.

SP owns about 20 acres of land adjacent to the proposed MRT Blue Line Pusat Bandar Damansara station. Future projects is likely to be integrated with the station, thereby increasing attractiveness and consequently, its selling price.

SP also has a strong balance sheet with a net cash position of about RM200 million (RM0.58 per share). This is because it has a strong recurring cash flows from being a landlord of assets such as the 25 storey Menara Millenium. The capital values of these assets (including Wisma Help, Kompleks Pejabat Damansara) should also increase in future when the MRT stations are completed. These assets are located in close proximity to the Pusat Bandar Damansara and Sematan stations.

SP had been able to consistently grow its book value per share in the last five years. Its last report BV per share is RM5.11. A broker has issued a report on SP in March 2011 titled "Sitting on a Gold Mine". The analyst's estimated RNAV per share is RM7.31 per share.

The group also intends to launch its high end Batai project in the second half of 2011. Strong pre-sales could be a catalyst for price to move closer to BV of RM5.11 per share. Its major shareholder Kayin Holdings obviously sees value as it raised its stake from 61% to 66% recently. A take out by Kayin cannot be ruled out due to the past failed privatization attempts on the group.

Hence, with the numerous catalysts above, this sleepy company may well have its day in the sun soon!

Nerves of Steel

Asia Enterprise Holdings (AEH) continued to perform credibly in FY2010. The group registered EPS of 3.52 cents, extending its track record of profitability to 38 straight years.

With over 50% of its inventory gearing towards supplying the shipping industry, AEH is likely to benefit from the boom in the marine and offshore sector in 2011. In fact, the Group reiterated its bullishness by indicating that the Group "stands to benefit from rising steel prices".

AEH continues to maintain a strong balance sheet with 38% of its NAV being a net cash position of 14 cents.

Valuations wise, the Group remains compelling. At the market price of 34 cents, it trades at a 14% discount to its NAV of 38 cents. On a PER basis, it trades at 9.6x earnings. Excluding its cash horde, the PER dips to only 5.4%.

Hence, valuations does not look overstretched even though it has run up over 20% from our call on 21 December 2010 (when stock was trading at S$0.27 per share).