Nam Cheong. Corporate News Flash. Four Bumi PSV L-o-Is Now Firm Contracts SGD. Buy. SINGAPORE EQUITY Investment Research

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1 01-Mar May Jul Sep Nov Jan-13 OSK Research 01 Mar 2013 SINGAPORE EQUITY Investment Research Lee Yue Jer Jason Saw Buy Target Previous Price Shipbuilding SGD SGD0.34 SGD0.34 SGD0.26 Nam Cheong is the largest Offshore Support Vessel builder in Malaysia, specialising in small-mid AHTS, PSVs, and accommodation barges. It also operates a fleet of standby vessels. Stock Statistics Bloomberg Ticker Market Cap NCL SP SGD547m USD442m 52 wk H/L price (SGD) m ADT SGD3.99m YTD Returns -1.9% Beta (x) 1.30 Share Performance (%) Month Absolute Relative 1m m m m month Share Price Performance Source: Bloomberg Price Close Relative to Singapore Straits Times (RHS) Corporate News Flash Nam Cheong Four Bumi PSV L-o-Is Now Firm Contracts Yesterday, Nam Cheong announced that four of its PSVs, formerly on Letter-of- Intent since 20 Jun 2012, have now been converted to firm contracts for delivery in FY15. We think that Nam Cheong s current valuations are extremely attractive 7.6x FY13F EPS for the largest OSV builder in the Eastern Hemisphere riding the global OSV cycle upswing and maintain our BUY call with a TP of SGD0.34. Extended order book visibility. While there is little additional information content, this does extend Nam Cheong s order book visibility into FY15, and the Build-to-Order nature of these contracts will help to stabilise future earnings. Cash in the register. The conversion of the LOI into a firm contract implies that Nam Cheong has received the deposit on the vessels. We understand that the payment terms are 20% deposit and 80% on delivery and that this structure is back-to-back with the Chinese partner yard, which means that Nam Cheong has a net cash inflow on the contracts (i.e. positive float). Imputing our assumed 18.5% gross profit margin, we calculate that Nam Cheong now enjoys a net RM14.6m additional cash balance. Hungry Chinese yards are Nam Cheong s gain. The shipbuilding industry in China is starved for contracts, and to maintain employment the local governments have pulled out all stops to support able shipyards with funding. As such, the working capital requirement for Nam Cheong s build-to-stock programme (which for other companies building exclusively in their own yards would be a huge drain on cash) is greatly reduced. From an operational point of view the minute Nam Cheong sells a vessel, that project becomes cash-flow positive. We would view further BTO orders and shipchartering contracts positively for recurrent cash flow and earnings diversification. Nam Cheong currently earns most of its income from its build-to-stock shipbuilding programme. This trades off cash flow and earnings volatility in return for higher margins. Given the operating background as described above, we see benefits in a slightly larger proportion of build-to-order contracts which will ease the earnings volatility and provide positive float. That said, we see ship-chartering as a bigger opportunity to provide even more of the same benefits chartering margins are far higher (gross margins can be in excess of 50% compared to shipbuilding under 20%), and the cash inflow is much more consistent than waiting on lumpy order wins. In general, we are seeing charter rates in the region rising, and to ensure a good return on invested capital, Nam Cheong should enter into similar chartering partnerships like the JV arrangement involving the accommodation workboat with fixed charters of three to five years. Valuations extremely attractive at 7.6x FY13F EPS. Maintain BUY with TP SGD0.34. We see deep value in Nam Cheong, now trading at only 7.6x current-year earnings. This is an extremely attractive multiple for a company with i) an entrenched position as the largest OSV-builder this side of the world; ii) almost the entire Malaysian OSV market share; iii) a strong industry backdrop of an OSV cycle upswing after the massive rig orders last year; iv) 20%/16% EPS growth this year and next year; iv) Record net order book at about RM760m. Our TP is based on an undemanding 10x FY13F EPS. OSK Research See important disclosures at the end of this report 1

2 OSK Research 01 Mar 2013 Figure 1 S-Curve revenue recognition model for forecast building programme ID Delivery by year Status Price (US$ '000) F 2013F 2014F 2015F AHTS Delivered 11,500 1, AHTS Delivered 11,500 1, AHTS Delivered 11,500 1, AHTS Delivered 11,500 9, AHTS Delivered 11,500 9, AHTS Delivered 11,500 11, AHTS Delivered 14,000 13, AHTS Delivered 26,000 26, AHTS Delivered 36,000 3, MPSV Delivered 27, MPSV Delivered 29,100 29, AWB Delivered 27, AWB Delivered 27,000 5, AHTS Delivered 11,500 9,890 1, AHTS Delivered 12,667 2,533 10, AHTS Delivered 12,000 3,120 8, AHTS Delivered 12,800 12, AHTS Delivered 22,000 13,200 8, AHTS Delivered 11,500 2,990 8, AHTS Delivered 12,667 1,520 11, AHTS Delivered 12,000 12, AHTS Delivered 12,000 12, AHTS Delivered 11,900 11, PSV Delivered 20,000 16,000 4, PSV Delivered 20,000 3,200 16, AWB Delivered 27,800 16,680 11, AHTS Stock 32,000 32, AHTS Stock 11,500 11, AHTS Delivered 12,667 1,900 10, AHTS Delivered 11,900 11, AHTS Order Book 11,283 2,933 8, AHTS Order Book 11,500 2,300 9, AHTS Order Book 11,500 1,725 9, AHTS Order Book 11,283 2,933 8, AHTS Stock 11,500 11, PSV Order Book 20,000 16,000 4, PSV Stock 20,500 20, PSV Stock 20,500 20, PSV Stock 20,500 20, PSV Order Book 20,010 3,202 16, PSV Delivered 30,000 2,700 27, PSV Delivered 33,400 30,060 3, PSV Order Book 32,100 31, AWB Order Book 29,500 10,325 19, AWB Order Book 29,500 10,325 19,175 OSK Research See important disclosures at the end of this report 2

3 OSK Research 01 Mar 2013 All stock vessels below assumed sold 2 to 4 quarters before completion AHTS Order Book 11, ,703 1, AHTS Order Book 11,283 2,933 8, AHTS Stock 11,200 11, AHTS Stock 11,200 11, AHTS Stock 11,200 11, AHTS Stock 20,000 5,200 14, AHTS Stock 30,000 30, AHTS Stock 20,000 20, AHTS Stock 20,000 16,000 4, AHTS Stock 20,000 3,200 16, AHTS Stock 20,000 5,200 14, PSV Stock 19,000 19, PSV Stock 19,000 19, PSV Stock 19,000 19, PSV Stock 19,000 3,040 15, PSV Stock 19,000 19, PSV Stock 19,000 19, PSV Stock 19,000 19, PSV Stock 19,000 4,940 14, PSV Stock 30,000 29, PSV Stock 30,000 30, AWB Stock 29,500 27,730 1, AWB Stock 29,500 23,600 5, AWB Stock 29,500 26,550 2, AWB Stock 29,500 29, AHTS Stock 11,200 10,080 1, AHTS Stock 11,200 2,912 8, AHTS Stock 11,200 11, AHTS Stock 20,000 20, AHTS Stock 20,000 20, AHTS Stock 11,200 8,960 2, AHTS Stock 11,200 11, AHTS Stock 11,200 11, AHTS Stock 11,200 11, AHTS Stock 11,200 11, PSV Stock 19,000 19, PSV Stock 19,000 19, PSV Stock 19,000 19, PSV Stock 19,000 19, PSV Stock 19,000 18, PSV Stock 30,000 30, AWB Stock 29,500 29, AWB Stock 29,500 29, AWB Stock 29,500 29, AWB Stock 29,500 29, PSV Order Book 32,500 9,750 21, PSV Order Book 32,500 3,575 26,975 1, PSV Order Book 32,500 3,900 28, PSV Order Book 32,500 2,925 29, F 2013F 2014F 2015F Model Revenue (US$ '000) 186, , , , ,814 USD-RM Model Rev (RM '000) 584, ,879 1,177,775 1,386,147 1,771,483 Actual Rev to date (RM '000) 564, ,015 Variance 3.50% 3.32% OSK Research See important disclosures at the end of this report 3

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