Singapore Stock Market: Construction Stocks Fly

Most investors would shun a stock with a net earnings drop of 69%, but a closer look at Hupsteel shows cash reserve growth, faster debt collection and significant borrowings reduction that may set the stage for ramp-up in business volume when demand recovers.

The market seems to think so.

From a low of 10 cents in Mar this year, Hupsteel’s stock price has almost tripled, closing at 28 cents on Friday.

Hupsteel is a stockist of industrial hardware and equipment for the oil & gas, chemical & petrochemical, energy, marine and infrastructure industries, and specializes in structural steel products and pipes.

Swapping inventory and debt for cash protected the company during the financial melt down, said its CEO Lim Kim Thor in a recent press statement.

He also said the cash hoard enables Hupsteel to respond more nimbly to M&A opportunities.

Its net earnings fell from S$45.1 million for FY08 to S$14.1 million for FY09 (Jun year end) due to a sharp drop in selling prices and a slump in demand for steel products during the recent recession.

Hupsteel’s latest quarterly results for Apr to Jun 2009 shows earnings recovery.

The contraction in trading volumes, however, enabled the company to cut back on inventory and improve its balance sheet.

The company was able to conserve cash by halving inventories to S$67.1 million (FY08: $137.7 million).

Cash and cash equivalents doubled year-on-year to S$53.6 million (FY08: $27.4 million).

It also reduced receivables by 43% to S$62.5 million (FY08: $109.0 million).

With the higher cash balance and faster debt collection, total borrowings decimated to S$6.9 million from S$68.4 million a year earlier.  So, gearing is now only 0.02.

Prices for most of Hupsteel’s structural steel products have recovered by about 20% since March 2009.

According to a company filing on its FY09 results, the management expects demand to remain soft until public infrastructure spending provides a boost in 1H10 (Jul-Dec 2009).

CIMB-GK maintains ‘Overweight’ call on construction sector

The good news is: construction demand is expected to be strong over the next 2 to 3 years.

CIMB-GK recently reiterated its ‘Overweight’ rating on Singapore’s construction sector.

In addition to mega contracts from the Land Transport Authority such as Downtown Line Phases 2 and 3, as well as Sports Hub over the next 12 months, the analyst, Lawrence Lye, also expects to see more private sector projects.

Its top picks include Hong Leong Asia, Tiong Woon, United Engineers and Yongnam.

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