Is Yongnam's disappointing FY2013 financial result a concern?

Yongnam reported its 2013 full year result just yesterday. I have friends and colleagues coming to tell me that Yongnam's profit drop drastically and its shocking. Yes it is if you're just looking at the numbers. Yongnam's net profit actually dropped by a whooping 87.3% from 43.5 million to just 5.5 million. EPS dropped from 3.45 in FY2012 to 0.44 in FY2013. I'm vested in this company since August last year so i should be concern right? Or maybe not. Ok, enough of the bad numbers. Let's look at what happened.

Firstly, revenue actually increased by 19.9% for them but why did profit dropped so much? This mainly has to do with cost over run of 3 structural steel works projects. Which 3 projects was it they did not mention in their report. This caused its cost of sales to increased by 43.3% resulting in lower gross profit.

There was also a "one-off non-recurring loss of $8.1 million on disposal of fixed assets in 3QFY2013 and a $5.1 million provision made on amounts owing from Alpine Bau GmbH, the insolvent main contractor for MRT Downtown Line 2 in 2QFY2013 caused General and Administrative expenses to spike from $24.2million in FY2012 to $31.1million in FY2013. However, this increase was partially offset by a decrease of $6.3 million in staff expenses during the year."

In spite of the drastic reduction of profits, Yongnam still declared a dividend of 0.6cents. This shows that they are still rewarding shareholders even when profits suffer. The cost overrun should be temporary and more of a one off event. Moving forward with more projects coming up, Yongnam's profit should return back to normal and even increase. With Singapore's Land transport authority already awarded various contracts for the construction of the new Thomson line, Yongnam will certainly be part of the game. Previously, Yongnam has been doing most of the Specialist Civil Engineering works for the MRT circle line.

Let's take a look at some of Yongnam's on-going projects:

1) National Art Gallery

• Contract worth $38.8 million
• Expected to complete 2Q 2014

2) Singapore Sports Hub (previously National Stadium)

• Contract worth $110 million
• Expected to complete 1Q 2014

3) Market Street Development

• Contract worth $36 million
• Expected completion in 3Q 2014

4) South Beach Development

• Contract worth S$21 million
• Expected completion Sep 2014

5) Marina One (New marina bay CBD)

• Contract worth $168 milion
• Expected completion in 2016

6) Various Singapore Downtown line projects

• Total contracts worth $221 million
• Expected completion June 2014 to Aug 2015

7) HK MTR Extension – 8 contracts

• Contracts worth HK$766.6 million
• Expected completion between 2014 to 2016

All the above on-going projects is expected to provide Yongnam with stable profits for at least the next 1-2 years. There are other potential projects for example the new Changi Airport terminal 4, Project Jewel in Chnagi Airport and Thomson Line etc. The construction sector does look promising to me at least for Yongnam who's playing a part in the commercial and infrastructure upgrade by the government. 

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