Recently, I have been trying to look at sectors that have been through a rough patch to see if I can find any hidden gems within this depressed sectors. One sector that pops up is the construction industry. Property prices have been stuck on the ground for some time now. As property developers grapple with the cooling measures imposed by the government, this means lesser construction demand by property developers which affects the construction industry as a whole. I feel it is in times like this we are able to look for promising companies that are strong enough to weather this storm and thrive when the sectors eventually recovers. One such company that came across is Tiong Seng Holdings Ltd.
A little bit about Tiong Seng. Tiong Seng is a homegrown construction and civil engineering company with 58 years of track record. JTC@Tuas, Mediapolis@One North the new home of MediaCorp, SIM Campus were just some of the projects that Tiong Seng have undertaken. They are also into property development in China, mainly with projects in the second and third-tier cities like Suzhou and Yangzhou.
– Debt level –
Tiong Seng’s debt is a bit on the high side. It have a 92m dollars cash & cash equivalent but debt of about 175m dollars (ST+ LT).
That’s about 2 times its cash & cash equivalents. As the construction industry is a very competitive industry that require high upfront costs, I wanted to see if this figures are considered over-leverage. Hence, I decided to do a comparison across some of the big construction companies listed in the SGX. I chose 4 companies with comparable market cap to Tiong Seng and did a comparison of their debt levels.
Hence, in my opinion, Tiong Seng debts/CCE of about 2 times seem to be acceptable for a construction company.
– Cash Flow –
Managing cash flow in a construction company is rather challenging. There’s always a risk when any business take on a huge capital to finance a project. Furthermore, earnings in the construction industry are usually lumpy in nature as they receive their earnings in phases. This could lead them into a huge debt spiral if they borrow huge amounts and are unable to repay them in time due to unsuccessful project tenders, costs overrun etc.
It has recorded positive cash flow from operations for 4 out of 5 years. Net change in cash is positive for 2 out of 5 years. It’s cash flow is still considered decent in my opinion.
– Management –
Tiong Seng was founded by the current CEO’s father, Pek Ah Tuan. Peck Tiong Choon which is a company founded by the current CEO’s father and his brothers. Peck Tiong Choon have a 59.8% stake in Tiong Seng. One of the non-executive director, Lee It Hoe also deemed to have about a 63.1% stake in the company.
What I think it means is that members in the board like Mr Lee It Hoe have Tiong Seng’s shares through Tiong Seng Shareholdings. Furthermore, the current CEO being the son of Mr Pek Ah Tuan should have a vested interest to advance the business started out by his father. Of course, that is hard to say. Family business can be prone to infighting and can fail as well. But I have to say I have been rather happy with the management’s decisions so far. I will share with you why below.
– Technology focused –
The adoption of technology in the construction industry have been a long drawn process. In an environment where competition to offer the best tender is strong, it is hard to see these companies adopting technology to aid productivity. However, Tiong Seng have a different approach in this. For instance, Tiong Seng invested in the very first Precast Automation Hub in Singapore where they have experienced a significant 70.0% reduction in manpower while raising output and maintaining consistency. They also use computer software programs to ensure that their buildings are well designed before starting actual construction reducing wastage. Tiong Seng also employ the use of PPVC and PBC where a portion of the building are fabricated off-site. Building Construction Authority (BCA) have also been encouraging the use of such approach.
In my opinion, Tiong Seng’s innovation to the construction industry will put it in good stead to provide not just quality but also efficiency. Being one of the few construction firms in Singapore to focus so heavily on technology, I think this factor should play out well in favour of Tiong Seng in the future.
– Construction industry to be boosted by public sector demand in 2017 –
Given the current property outlook, private demand for construction remains soft. However, the government have announced more public construction work in 2017, valued to be around $24 billion. Tiong Seng have the highest A1 grade from BCA for both civil engineering and general building which allows it to undertake public sector projects with unlimited value. To illustrate how prestigious that is, take a look below.
BCA grades the construction sector in two categories, General Building and Civil Engineering. To be able to obtain A1 for both categories is certainly not an easy feat. Most companies only have 1. Hence, with public sector demand rising, Tiong Seng should be in a nice position to grab a share of the pie given its strong track record. Besides, it is becoming a common practice for the government to award contracts to companies that may not be the lowest bidder in tender exercises.
– China Property Bubble –
Property prices in China have been running sky high. In the short term, that could definitely be a boost to Tiong Seng’s revenue. However, like every bubble, there will be a correction coming. China’s government have put in place many cooling measures like tighter loan restrictions to simmer down the property market.
As we can see a top has formed, and a correction will definitely not be good for Tiong Seng’s property developments business in China. Revenue will definitely be affected. However, in my opinion, the main issue with China property prices, is speculation. Prices can raced up about 23% in a year.
An article in Business Insider also explains that the Chinese government is looking for healthy developments of the real estate market.
Hence, I believe that although Tiong Seng’s China venture will be impacted when the property bubble burst. Their strategy to only develops in 2nd and 3rd tier cities will help them in the long run as China embraces the OBOR initiatives to connect more of their cities together through building infrastructure. Furthermore, by developing in the 2nd and 3rd tier cities, it can translate to lower costs compared to a 1st tier city. We shall see how their China venture pans out, hopefully they have learn their lesson from their overseas venture debacle in 2014.
– Execution risk –
And like all construction companies, execution risks remain the most probable. Having to deal with rising labour costs, material costs, safety etc etc. It is important that a construction companies do not run into a Stop Work Order, which will be no good to the company. However, given Tiong Seng’s track record, that risk should be relatively smaller compared to other construction firms.
Tiong Seng’s PE stands at 7.7 as of today with a price of $0.260 per share. Tiong Seng’s PE don’t really tell much as most construction firms are undervalued at the moment. Also, the construction industry being a lumpy in nature, we may experienced very wild fluctuations in their earnings and hence their PE ratio. A better indicator would be their Net Asset Value (NAV), it stands at $0.594 with $0.164 cash in hand per share.
Also, based on the chart, it has been consolidating at a rather low price for some time now, which provides a favourable entry point. If Tiong Seng can achieve more contracts in 2017, there will be a strong reason to believe an upward break out in price can be achieved. Currently, I am not vested yet as I am still observing the price movement of the stock. Do always remember to DYODD! Cheers! 🙂