Lian Beng Group Ltd - Do CEO share purchases signal higher profit and dividends?

Revenue increase but profit decline. Construction demand outlook appears brighter but can the Group get more projects?

9/11/2013 – Lian Beng Group Chairman and Managing Director Ong Pang Aik has increased his stake in the company by 427,000 shares since publishing first quarter results on October 10.

Disclosures to the Singapore Exchange between October 11 and November 5 show he has increased his direct stake by 227,000 shares.

He also owns a deemed stake of 30.35% through Ong Sek Chong & Sons Pte Ltd, which bought a total of 200,000 shares in the same time period.

Its last transaction November 1 was priced at S$0.5584 per share.

This follows Q1 earnings with a revenue spike of 44.2% but a decline in profit by 19.8%.

The holding company with primary business in construction and secondary operations in property development/investment, engineering and construction-related businesses, is 'cautiously optimistic' of the upward revised forecast for Singapore's construction market by the Building & Construction Authority (BCA).

The BCA had on September 3, 2013, increased total construction demand for 2013 by S$2 bln, bringing the range to fall between S$28 bln and S$34 bln.

For 2014 and 2015, the BCA also projects a S$22 bln – S$30 bln per annum demand, of which 60% will come from building works and the remaining 40% from civil engineering projects.

Management says it will leverage its track record and capability to tender for more public and private sector projects.

These are the company's Q1FY14 results published on October 10:

Revenue: +44.2% to S$163.5 mln
Profit: -19.8% to S$8.5 mln
Cash flow from operations: S$19.9 mln vs (S$70.3 mln)
Cash reserves: S$200.7 mln vs S$184.3 mln
Dividend: None
Order book: S$1.2 bln (as of August 31, 2013)

Revenue spiked by 44.2% because of increased revenue recognition from its construction and property development divisions, as well as contributions from the ready-mixed concrete and dormitory businesses.

Cost of sales grew 47.2%.

A jump in distribution expenses to S$3 mln was due to higher selling and marketing expenses from the sale of Spottiswoode Suites and The Midtown.

This was a relatively small amount in the context of its S$163.5 mln revenue, but mattered considerably to the bottom line because profit was only

Similarly, finance costs jumped to to S$477,000 – a small amount with a sizeable impact.

This was due to interest paid this quarter for the dormitory which received its Temporary Occupation Permit (TOP) in March 2013.

The interest incurred on the dormitory in Q1FY13 has been capitalised.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Do CEO share purchases signal higher profit and dividends?

With an order book of S$1.2 bln underpinning revenue until FY2016, it would appear that the CEO's share purchases are to be seen as a positive.

But what drove his own personal investment decision?

The price-to-book ratio of the company is 1.1x, so this would signal that either profit, or cash holdings, or dividends are set to rise – or all three.

But it also suggests that CEO Ong is not concerned about the current debt situation.

Question

2. What is the plan to repay the S$63.8 mln?

Total borrowings of S$279.4 mln are being used to finance a dormitory at Mandai Estate.

The Group has adopted the new and revised Financial Reporting Standards (FRS) and Interpretations of FRS (INT FRS) which are effective for annual periods beginning on or after June 1, 2013, and these did not in substantial changes to accounting policies or significantly impact the Group's financial statement.

Management explained that the decrease in other income and interest income was due to two events.

First, a drop in rental income following the cessation of leases for Hougang Plaza which was due for redevelopment.

Second, a cessation of interest charged in this first quarter to Emerald Land Pte Ltd because the Group divested its equity interest in the company in Q2FY13.

Emerald Land is a private residential property developer incorporated in 2007.

Lian Beng Group's subsidiary Lian Beng Land Pte Ltd decided on its move to sell its shares on September 13, 2012 to Pallas 28 Investments Ltd.

The primary motivation is reportedly slow sales of 111 Emerald Hill.

Other operating income plunged 63.4% from S$2.7 mln to S$995,000.

Depreciation of property, plant and equipment increased by 17.9%, from -S$2.3 mln to -S$2.7 mln, due to addition of plant and equipment and purchase of vessels.

(Total:4 questions)

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