Friday, October 11, 2013

Income Investing: Low Key Contractor with Good Dividend Yield - Lum Chang

This is an excerpt of article which appeared in the Edge on 29th April 2013

Family-controlled Lum Chang Holdings does not attract much attention in the market. Yet, the decades-old contractor is an interesting play on Singapore’s property and infrastructure boom. And, its dividend of two cents per share provides investors with a steady dividend yield of about 6%. Its market value of just $123.8 million is currently a 28% discount to its book value of $173.2 million. The company also has a liquid balance sheet, with a net cash position of $33 million as at end-2012.
Much like other contractors, Lum Chang has taken stakes in property development projects. For instance, it has a 30% stake in Twin Fountains, an executive condominium (EC) development in Woodlands. The remaining stake is held by Frasers Centrepoint. The project was sold out swiftly earlier this month. The company also has a 20% stake in another joint venture with Frasers Centrepoint to develop Esparina Residences, an EC located in Sengkang that is due to receive its temporary occupation permit (TOP) at end-2013.

The company’s forte lies in the construction of commercial buildings. They do a lot for companies such as Ascendas and LaSalle [Investment Management]. LaSalle was the partner in some projects such as Twenty Anson which was a joint venture. Lum Chang took a minority stake in Twenty Anson and constructed the building. In March last year, LaSalle and Lum Chang sold Twenty Anson to CapitaCommercial Trust for $430 million.

Lum Chang’s share of the profit was $6.3 million. Lum Chang was also the contractor for Crowne Plaza hotel at Changi Airport, a development that was owned by LC Development and a fund managed by La- Salle. LC Development is linked to the family that controls Lum Chang. The hotel was sold to Overseas Union Enterprisefor $299.5 million in 2011.

Lum Chang’s construction order book stood at about $600 million as at Dec 31. Its ongoing property development-related construction work comprises six projects. Two of these projects are for Ascendas: Nucleos in Biopolis Road and a business park development in Science Park Drive. Lum Chang is also building The Metropolis for Ho Bee Investment at Biopolis, Ripple Bay Condominium for MCL Land in Pasir Ris, and Esparina Residences.
Lum Chang’s largest project is the $450 million contract (officially named C912) to build an MRT station and a 1.8km cut-and-cover tunnel for Downtown Line Phase 2 in the Bukit Panjang area. The station will be largely underground with two basement levels and provisions for future underground pedestrian walkways to adjacent developments.

Lum Chang is trying to secure more MRT-related work but competition is stiff. Notably, the company tendered for a few projects for Downtown Line Phase 3 (DTL3), but failed to secure any work. “We found that if we tendered for standard stations, we were competing with a lot of players who could do it for less,” Fong admits.

In the meantime, Lum Chang is also looking into bidding for other types of infrastructure-related work, such as roads and highways. “We did the water reclamation plant at Changi. That is the deepest tunnel we have done,” Fong adds.
Credit: Bloomberg
Lum Chang also has a foothold in Malaysia, where it develops property. They are exploring the KL MRT project at the moment. The company’s main project in Malaysia is a 125-acre plot of land in Cheras on which it is developing landed property in phases. It’s about 600 units and just over RM1 billion [$407.7 million] worth of development.

The company also owns 30 acres in an area called Kemensah, just north of Zoo Negara, which is being developed into luxury bungalows.

Interestingly, Fong, executive director of Lum Chang, says profit margins for property development projects in Malaysia are higher than in Singapore. “Land is much cheaper; construction is cheaper in Malaysia than in Singapore,” Fong says. However, under its accounting policy, the company does not recognise revenue and earnings from its property development interests in Malaysia and its EC developments in Singapore. “We’ve got to wait till TOP,” Fong says.

Hence, Lum Chang’s reported revenue and earnings tend to be lumpy. For 1HFY2013 (the company has a June year-end), it reported a 202% rise in revenue to $67 million and a 220% jump in earnings to $12.1 million. Fong says this was because of the completion of certain phases of its projects, but warns that the same level of revenue and earnings might not be achieved in 2HFY2013.

“The nature of our business is project-based, so profits and revenue have a lot do with accounting policy,” Fong says. “And, it’s a bit lumpy in terms of profits because it depends on when projects finish.” Another uncertainty for investors is labour costs as the government tries to scale down the import of foreign workers, he adds.

To improve stability of income, Lum Chang made a property investment earlier this year. In February, it said it had bought property located at 42-60 Kensington High Street, London for £40.19 million ($76.8 million). “Our income will be mainly from the ground floor, achieving rental income from shops such as Zara, Topshop and Miss Sixty. The leases there are very long, 10-year leases and these will provide a good steady income,” Fong says.

The yield of the London property works out to 4.5%, giving an annual income of $3.4 million, according to a report by UOB Kay Hian. That is about 15% of the company’s earnings for FY2012. “We’ve always been project-based, either property development or construction,” Fong says. “We felt we should go for another line of business that could generate sustainable income.

Fong says Lum Chang is now looking for more ways to expand its recurring earnings base. “We are open to diversifying,” he says, adding that the company is already looking at one interesting project. “The operations would allow us to receive sustainable income for decades,” he says, declining to provide more details. Another opportunity Fong sees for Lum Chang is the refurbishment of old commercial buildings.

“A lot of old commercial buildings are looking tired. Instead of tearing them down, landlords are building extensions. We could be involved in doing that,” he says.

Lum Chang has paid a dividend of two cents per share for the last three financial years. “Our shareholders are usually the older generation who have been holding [our shares] for years and they want regular income,” Fong says. In fact, the dividend payout was raised from 1.5 cents per share to two cents in FY2010. “We felt our profits had stabilised and two cents is something which is quite achievable and sustainable over the medium term,” Fong says.

Lum Chang does not have much of a following among analysts, though. However, UOB Kay Hian notes that the stock appears to be inexpensive. “Trading at 0.8 times price to book looks reasonable when compared with peers’ average of one time,” the brokerage states in a report. “Since FY2010, Lum Chang has maintained a net cash position. Its stock price is underpinned by cash reserves of $77 million as at Dec 31, which accounts for 62% of its market cap.”

Amid the hunt for yield, Lum Chang seems a good alternative to real estate investment trusts and consumer-oriented stocks that have run up sharply over the last couple of years. The company has maintained its dividend payment of 2 cents over the last 3 years and it has increased its revenue and profit
Based on the S&P report on Lum Chang, LCH’s order book currently stands at SGD474 mln. Construction sector outlook remains sanguine as the Government continues to accelerate infrastructure spending to keep in line with population expansion. This is a stock with good dividends and at the same time allow investor to participate in the growth of the construction sector

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