Construction counters

[ichiran]

Dydx-san,

thanks for pointing this out. Hence, with this one-off gains removed, the actual PER should be 5.9.

Appreciate your views on what is the best way to value a construction company and derive its intrinsic value?

Thanks

[Nick]

Considering that construction companies earnings are cyclical in nature, is it wise to use PER to determine its valuation ? I noticed Koon earnings fluctuates violently over the past 4 years so do you reckon that i has stabilized or has it peaked ?

Thanks for sharing.

[ichiran]

Hi Nick,

If we were to examine the earnings contributors of Koon, I guess it should still be considered as a construction company at this point (i.e. 1H2010 - 8% precast, 75% construction, 11% land based rental, 6% marine logistics) and it's earnings cyclical in nature, hence I agree with you that PER is not the best way to value Koon. Perhaps as what Yeokiwi-san suggested, using NAV is a more appropriate method.

As to whether earnings have peaked, I think it's anybody's guess as nobody can say for sure that they will be securing more contract wins. But based on the direction that the company is taking and their timely move into pre-cast business, I would hazard to say that their operating cash flows should continue to improve for the next few quarters. Only thing left is to do is to figure out the intrinsic value of this business.

My 2 cents' worth.

Appreciate views from other forummers pls. Thanks.

[dydx]

Appreciate your views on what is the best way to value a construction company and derive its intrinsic value?

I think the key elements have to be the sustainability and predictability of the company's business volume and profitability. For this, the past track record matters, but more importantly, we should focus on the order book - total size, types/complexity of projects, their duration, quality aspects of the direct/ultimate customers, payment terms, etc. - and other quality aspects, e.g. technical/engineering expertise within the company, business strategies, risk management, etc.

We should be always mindful of the many unique risks impacting a construction project or business, including inclement weather, worksite accidents, delays caused by technical/engineeering problems, shortage of materials or manpower, change of design after work has begun, etc., etc. Apart from the above, profitability of a construction project can also be negatively impacted by a rise in material prices, customer claims related to quality of work done or delay in completion, payment default by customers, etc.

Considering all the above, it is difficult to imagine investors will be readily willing to pay a substantial premium over NAV for a construction company, unless the company is of very high quality in most key aspects or has some other valuable assets or earning streams.

[ichiran]

Dydx-san, thank you.

Following what you mentioned above, I've done a quick check on the other companies within the construction industry, and it seems that most of them are now trading at above their historical NAV. For example, prices of OKP, Hock Lian Seng, Wee Hur and Yongnam are now close to twice or more of their NAV. Of course, this is based on their historical NAV and should be re-adjusted when they report their full year results.

Once again, I would like to thank you for your valuable inputs. I really appreciate it.

[pianist]

Dydx-san, thank you.
Following what you mentioned above, I've done a quick check on the other companies within the construction industry, and it seems that most of them are now trading at above their historical NAV. For example, prices of OKP, Hock Lian Seng, Wee Hur and Yongnam are now close to twice or more of their NAV. Of course, this is based on their historical NAV and should be re-adjusted when they report their full year results.
Once again, I would like to thank you for your valuable inputs. I really appreciate it.

i am just wondering how different is a contruction counter from a property developer in term of investment analysis?

[dydx]

Koon went ex-bonus (1-for-1) on 17Dec10 (last Friday) and closed at $0.31 today (20Dec10), vs. the closing price of $0.625 on 16Dec10. It appears the bonus has not added any value to Koon's market cap. and share price - rightfully so!

[yeokiwi]

Koon went ex-bonus (1-for-1) on 17Dec10 (last Friday) and closed at $0.31 today (20Dec10), vs. the closing price of $0.625 on 16Dec10. It appears the bonus has not added any value to Koon's market cap. and share price - rightfully so!

It doesn't even improve the liquidity much
Anyway, Koon will report the final year result end of next month.
Hopefully, there is some special dividend.

The uncertainty now is the vietnam project since it constitutes a large proportion of the contract won.
The precast business should last nicely for the next 2-3 years due to the large no. of HDB flats being built.

[mrEngineer]

Do you guys think Chip Eng Seng is underpriced? Stable ROE, fantastic yield, winning plenty of govt projects, transparent reporting?

The only failure is the oasis project at pasir ris..
Another key note is the massive capitalising of expenses into the development asset.. Need to read up on how they going to convert it to cash eventually..

Looking at the no. of projects, my head starts to spin..
1) Prive EC - not bad unexpected performance
2) Oasis@Elias - Bad
3) Pasir Ris Condo JV with Choiceshomes - Bad decision
4) Bedok DBSS - Bao Jiak
5) Simei Condo - Bao Jiak with new university
6) Grange Infinite - should be looking up with high end property boom
7) Ventuno Balmoral - unsure how many units left
8) Cityvista - Fully Sold.. finally
9) Vietnam - ?
10) Melbourne CBD property -?
11) Pasir Panjang Industrial - not sure how it will perform
12) 60% equity interest in Fujian building material company - looks good

Will wait till latest curb measures announcement before taking action. interesting stock for short to mid term. Not so for long term (because of property bubble)

[vader1671]

I'm looking to invest in construction counters. However, I know more or less nothing about the construction industry. I've read through this thread with great interest.

What are the key items I need to take a look at to properly value a construction counter? I've noted that Koon and KSH are interesting counter to take a look.

Should there be anything I'd look out for that is unique to this industry?