Swee Hong-Multibagging turnaround Potential (FUNDAMENTAL ANALYSIS)
Swee Hong – Turnaround Play
Catalyst:
Resolving of previous financial distress represented by bringing the Creditors Scheme of Arrangement to closure
Strengthening of order book with successful tendering of key profitable projects
Full year profitability signaling a turnaround
Swee Hong Limited has managed to ride through the financial distress which is coming to end. We forecast Swee Hong Limited to remain profitable for the fourth quarter owing to strong progress of current project pipeline. This would see full year positive earnings revisions for the company, and hence we suspect this will lead to both earnings upside to consensus estimates and multiple expansion.
Company description:
Founded in 1962, Swee Hong has more than 43 years of experience in the civil engineering industry. Swee Hong provides a wide range of civil engineering works such as road and drain construction, road maintenance, sewerage rehabilitation, soil improvement, excavation, laying of water pipes and other infrastructural works. Since 2007, Swee Hong has been awarded with several award-winning iconic projects such as the Gardens by the Bay. Over the years, the Group has completed other notable civil engineering projects such as the Changi Ferry Terminal project, Alexandra Canal project, Tuas View Extension project and Seletar Aero Drive project.
In 2015 however, Swee Hong Limited met with financial difficulties which forced it to halt operations temporarily as its creditors demanded their overdue payments. Due to its highly leveraged asset base coupled with cash flow disruptions, Swee Hong Limited arranged for a debt restructuring exercise with its main creditors namely the Building and Construction Authority (BCA), United Overseas Bank (UOB), and ACL Construction. Eventually, a debt-for-equity swap was implemented under the Creditors’ Scheme of Arrangement to pay off its debt obligations.
Main current project pipeline:
ER382 – New road between MacRitchie Viaduct and Adam Flyover
The Land Transport Authority has awarded the contract to Swee Hong Limited to carry out the construction of new road between MacRitchie Viaduct and Adam Flyover which is expected to be completed by the fourth quarter of 2017.
Nee Soon Tunneling Project
PUB has appointed Swee Hong Limited as the main contractor to carry out improvements to sewerage network in Yishun Central, Yishun Avenue 5 and Sembawang Road area. While this project had been met with delays initially due to cash flow issues, progress has bounced back strongly after the debt restructuring.
The progress of both projects mentioned above have been robust and is gaining momentum as the company shakes off its financial distress with the debt-to-equity exercise. As a result, Swee Hong Limited has swung back into the black for the current FY2017. We believe that through the debt restructuring, Swee Hong Limited now has the ability to maintain its steady progress that it is enjoying whilst being adequately leveraged.
Construction outlook and order book:
In early 2016, the Building and Construction Authority (“BCA”) projected construction demand to be between S$27 billion and S$34 billion, with 65% of this demand being driven by public sector demand. Construction demand from public sector remains high in year 2016 with key projects such as PUB’s water reclamation and sewerage projects, Changi Airport’s 3-runway system (package 2), improvement works to the Kranji Expressway and Pan-Island Expressway, associated infrastructure works for Changi Airport Terminal 5 and phase 2 of the Deep Tunnel Sewerage System.
Thus, with a new management team in place to carry the company forward, as well as smooth development to bring the Creditors Scheme of Arrangement to an end, Swee Hong Limited is now in a favorable position to tender for more profitable projects to strengthen its order book.
As of 31 March 2017, Swee Hong Limited has an order book which stands at S$80.9 million.
Financial performance:
For FY17, Swee Hong Limited has seen stellar performance thus far when compared to previous years. This signals a turnaround in the company’s financials as it generates positive returns for shareholders.
For a quick comparison, let us take a look at the snapshot below:
From the snapshot, we see that for the 9 months of FY17, Swee Hong Limited has produced a massive improvement of 76.1% in revenue. This is mainly attributed to the progress claims of the Civil Engineering segment which saw an increase by S$14.1 million to S$35.9 million from on-going projects, in particular the ER382 project. In addition, revenue from Tunneling segment had also increased by S$4.3 million to S$6.7 million with progress of the Nee Soon tunneling project back on track. Thus, total revenue had jumped from S$24.1 million in 9M-FY16 to S$42.5 million in 9M-FY17.
Consequently, net profit had turned positive from -S$12.3 million to S$30.1 million with an increase of S$42.4 million. One point to note is that in the 9M-FY17, the net profit included a one-off gain S$25.7 million due to write-off pursuant to the Creditors’ Scheme of Arrangement and also a gain on disposal of property, plant, and equipment. Even so, after adjusting for this non-recurring event, Swee Hong Limited would still have a positive net profit of S$4.3 million. Therefore, this proves that Swee Hong Limited’s core operations are already profitable and we expect greater profitability in the coming period.
To dive further into the efficiency of its operations, let us take a look at the following ratios:
From the above, we observe that gross profit margin of Swee Hong Limited had leaped by a whopping 256% compared to the same period in the previous year. Breaking down the cost of works as a percentage of revenue, we also see that it had decreased by 11% which in turn led to the improvements in margin. With the ability to handle more projects, we think that Swee Hong Limited will be able to achieve high gross profit margin due to greater economies of scale as machines are being deployed for multiple uses.
As for operating margin, Swee Hong Limited is currently at 70.7%. As previously mentioned, such high operating margin is due to the one-off gains recorded. Adjusting for one-off gains leaves Swee Hong Limited with an operating margin of 10.3%. While unlikely to be impressive, this is a great step forward for Swee Hong Limited as it was previously unprofitable. Also, with Swee Hong Limited going through extensive organizational restructuring mainly to improve operational efficiency, optimize asset utilization, and reduce / eliminate overheads, this will ultimately enhance the operational efficiency. Tangible improvements can already be seen from a drastic decrease of 87.7% in administrative expenses from S$13 million in 9M-FY16 to just S$1.6 million in 9M-FY17. Thus, with such efforts to lower overheads, this will eventually trickle down to benefit the overall net profit margin.
With regards to the balance sheet strength of Swee Hong Limited, the company has seen a turnaround from a negative S$45 million net assets previously to positive S$7.9 million. This is largely attributed to the huge decrease in borrowings as well as trade and other payables. Hence, with the liabilities of Swee Hong Limited now reduced to a much more manageable level, the company should be able to generate higher profitability and earnings under good guidance going forward.
Risks:
Failure to secure new profitable projects
Any delays or stoppage of work due to further cash flow problems
Volatile nature of penny stock
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