Saturday, May 18, 2013

Soilbuild Construction Group Ltd

Short Summary:
Soilbuild Construction Group, a subsidiary of the Soilbuild Group which was taken private in 2010, is a general construction company with over 36 years of experience during which have handled a wide range of projects, from residential buildings to conservation houses, schools, churches, industrial buildings and business parks. Soil-Build is graded A1 by BCA, which allows the company to tender for public sector projects in Singapore of unlimited contract value.

Forecast Dividend Yield:
2012: 3.31%*
2013: No Forecast
*Based on issue price of $0.25, 664,000,000 units after IPO, profit after tax of $22 million in 2012 and minimum 25% profit distribution policy.

Dividend Policy:

-Multi-property sector approach to construction projects. The company is capable of executing business space and both public and private residential property construction projects.
-Graded A1 under the BCA registration category CW01 for General Building, Soil-Build is allowed to tender for public sector projects in Singapore of an unlimited contract value.
-Increasing the use of pre-cast concrete work in projects, which enables the company to reduce reliance on labor, whose cost is increasing due to increase in foreign levies.
-Intends to invest in productivity improvement measures, increase the use of automation and improved technologies, and improve the efficiency of construction process.
-Expected healthy supply of construction projects by URA, JTC and HDB to meet population demands
-Intends to expand construction and/or project management operations to certain countries in Asia such as Myanmar and other South East Asian countries. The company has secured two contracts in Myanmar at the Latest Practicable Date
-Gearing of only 1.70%

-Expect slowdown in construction sector in 2014 and beyond. BCA projected a total construction demand of between S$26 billion to S$32 billion for 2013 and S$20 billion to S$28 billion per annum for 2014 and 2015
-There may be a shift in HDB public housing strategy to focus on affordable housing for Singapore population. Contract value of tender may be lowered, which may impact on profit margin.
-Strong competition in Singapore construction sector. At the Latest Practicable Date, there are 64 registered general building contractors graded A1 under the category CW01, including Soil-Build.
-Order book not considered strong, amounting to approximately S$511.2 million only, comparing against a revenue of $213.5 million in 2012.
-Heavily reliant on foreign labor. The company has 642 foreign labor, representing  82.7% of the company total labor force. As announced in the Singapore government’s Budget 2013, there will be further increases in such levies in addition to the increase in the levies which was previously announced in the Singapore government’s Budget 2010, Budget 2011 and Budget 2012. In the Singapore government’s Budget 2012, the MOM announced a further 5% cut in the MYE quota for new projects with effect from July 2012. This is in addition to the 15% cut in the MYE quota for new projects with effect from July 2013 as announced in the Singapore government’s Budget 2011 and the reduction in the MYE quota by 25% over three years for the construction sector as announced in the Singapore government’s Budget 2010. (This will be a killer)
-Share expected to be illiquid, free float of only 25%. 496 million shares is controlled by parent company.

In my opinion, whether this counter is a hit or miss depends on its management strategy to reduce cost and win projects out of Singapore, where profit margins are higher. Singapore construction sector is a highly mature and competitive market. Going forward, I will expect public housing project margins to shrink further due to increasing levies and cutting of foreign workers quota. If HDB really change its focus to build basic housing to reduce the housing cost for its population, profit margins for construction companies taking the project will likely shrink further. Projects for industrial and business development typically has a higher profit margin. If the company is able to win more projects in this area, profits will likely increase. However, at the issue price of $0.25 and total unit of 664 million shares, the PE worked out to be 7.60, which is not really that attractive in investment sense. (In the prospectus, PE of 5.6 was based on 496 million shares pre-IPO). In summary, I will give this public offer a miss as I cannot find clear indication that the company will hand in better performance in 2013. Current book order of $511.2 million is not that strong a figure, basing on its revenue of $213.5 million in 2012. Besides, PE of 7.60 (to me) is definitely not an attractive figure to make me invest in a company.

Some useful information:
[17 May 2013], [5.00 p.m.] : Opening date and time for the Public Offer.
[22 May 2013], [12.00 noon] : Closing date and time for the Public Offer.
[23 May 2013]: Balloting of applications under the Public Offer, if necessary.
[27 May 2013], [9.00 a.m.]: Commence trading on a “ready” basis.

Rating for investment: 5/10

Disclaimer: You may use the above information as a guide, but please invest based on your own judgment.

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