We are discontinuing our coverage of Tiong Woon Corporation (TWC). While earnings have performed to modest expectations, we see few positive catalysts coupled with a deteriorating outlook. Valuations are also perpetually stuck at low levels, with the stock trading at just 1.5x forward PER and a sharp discount to book value, at just 0.3x.

TWC recently reported 1H09 net earnings of S$23.1m, up 119% versus 1H08, driven mainly by its mainstay Heavy Lift and Haulage segment. On a quarterly basis, TWC maintained its net profit at S$12m versus 1Q09’s S$11m. However, 1Q09 included a higher level of profit from one-off equipment disposals.

TWC’s pipe-lay vessel newbuild is still modestly loss making. TWC is slated to complete the project by mid-year. While the newbuild is contracted at a cost plus basis with a 5% -10% margin,we are assuming the contract to be breakeven at best. TWC is currently unable to secure further newbuild orders, and the Bintan yard will instead focus on low-level barge repair, rather than newbuilds.

The level of contribution from TWC’s Saudi Arabia contracts remains low, accounting for just 5% of revenue. However, 20% of TWC’s crane fleet is currently deployed in Saudi Arabia, primarily on Oil & Gas projects. While Saudi Arabia currently remains relatively unaffected by the global economic downturn, we may see this situation reverse sharply in the coming months, particularly if crude oil price remains weak.

While TWC is currently benefiting from a buoyant construction industry, we believe that this will taper off in the next 12 months. While we expect FY09 net profit to grow by 27%, we foresee flat earnings going into 2010, and a decline from 2011 onwards. The sole upside is that TWC may be a good acquisition target when market conditions improve, with an RNAV break-up value of 51cts per share, by our estimates.