Yongnam has been doing very well in recent years. Its management also shows a commitment in sharing the fruits of its achievements with shareholders as it paid steadily higher dividends in the last four years.
Yongnam's order book remains robust although its Q1 revenue and profit declined due to delays in starting up of a couple of projects. Is this why its share price has been languishing? Does Mr. Market expect Yongnam to underperform from this year on?
Well, to be fair, the broader market has been languishing too. It remains to be seen whether the 3,000 points pyschological resistance on the STI could be overcome.
With Yongnam, I am not so worried about its fundamentals. In fact, I expect the company to win more contracts as regional governments spend more on infrastructure projects. This will generate steady revenue for the company. With increasing contribution from its specialised civil engineering arm, profits are likely to improve at a steady clip.
What could be holding back its share price is its outstanding warrants. Warrants? Yes, the company had a 3 for 10 warrants issue in 2007. 3 for 10 is quite a big proportion. If all the warrants were exercised, we could see a 23% dilution in EPS. Then, its shares would look more expensive.
So, the question is whether Yongnam is able to make use of the funds productively to improve its EPS proportionally or more to negate any dilution concerns. This is something that no amount of foresight would be able to throw light on. So, a cautious Mr. Market is understandable.
Now, I would like to suggest that it is possible that holders of the warrants might not exercise the warrants. Reason? The exercise price is 25c a piece. With Yongnam's share price at 23.5c at the last closing, these holders could be better off allowing the warrants to expire and buying more shares of the company in the open market if they wanted to add to their long positions.
Also, if I remember correctly, the warrants were not free. They were sold at 3c a piece. So, the full price of a warrant turned share is actually 28c for the original warrant holders.
There are rather bullish 12 months target prices for Yongnam's shares by various research houses from 30c or so upwards. Unless Yongnam's share price is able go past 25c a piece, the exercise price of its warrants, I doubt holders would exercise their warrants and worries of dilution would evaporate, therefore.
The warrants expire 14 Dec 2012. That is only five months away. I guess I can only wait and see.
Related posts:
1. Yongnam: 3 new contracts worth $63.8m
2. Yongnam: FY2011 results.