Nam Cheong Ltd (LHS) Singapore Company Focus BUY S$0.44 STI : 3, Expanding presence in Indonesia. DBS Group Research. Equity 30 Sep 2014

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1 Singapore Company Focus Bloomberg: NCL SP Reuters: NMCG.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 3 Sep 4 BUY S$.44 STI : 3,89.7 Price Target : -Month S$.5 Reason for Report : Order wins, new investments Potential Catalyst: Earnings execution, dividends, order wins DBS vs Consensus: In line with consensus Analyst Suvro SARKAR suvro@dbs.com Price Relative S$. Jul- Nov- Mar-3 Jul-3 Nov-3 Mar-4 Jul-4 (LHS) Relative Index Relative STI INDEX (RHS) Forecasts and Valuation FY Dec (RM m) A 3A 4F 5F Revenue 877,57,89,37 EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) 8.5 nm nm EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): - - Consensus EPS (S cts): Other Broker Recs: B: 8 S: H: ICB Industry : Oil & Gas ICB Sector: Oil Equipment; Services & Dist Principal Business: Leading Malaysian builder of offshort support vessels Source of all data: Company, DBS Bank, Bloomberg Finance L.P Expanding presence in Indonesia Sells 8 vessels worth US$m in Sep; on track to beat last year s record of vessel sales Committed to invest c.us$3m for up to a 3% stake in Indonesia-listed growing OSV player PT BBR Recurring income stream plus potential of selling more vessels in growing Indonesian market Riding the cycle well; maintain BUY and S$.5 TP Sells 8 vessels worth US$m in Sep. Five of these eight offshore support vessels (OSVs) worth US$85m were sold to Indonesian OSV player, PT Pelayaran Nasional Bina Buana Raya (BBR), for delivery in 5. In addition, Nam Cheong has also secured vessel sale contracts worth US$4m for x 5,5bhp AHTS and x,5 AHTS vessels from repeat customers Vega Offshore (Norway), Vroon (Netherlands) and another emerging Asian player. YTD, Nam Cheong has secured vessel sale contracts worth US$45m, and looks set to exceed last year s record numbers. Orderbook has climbed to RM.9bn with these contracts. No change to our numbers at this stage, as these order wins are within our assumptions. Investing in Indonesia-listed OSV player PT BBR. Nam Cheong announced that it has signed an agreement with Singapore-listed Marco Polo Marine to invest in Marco Polo s indirect subsidiary, BBR. Marco Polo currently holds 49.% interest in BBR, which operates OSVs including AHTS vessels, tugs and barges in Indonesian waters. This will be Nam Cheong s second foothold in the cabotage protected market of Indonesia, after it formed a JV with vessel operator PT BNI last year. The underlying rationale for the transaction is to allow BBR the balance sheet flexibility to expand its fleet through vessel acquisitions from Nam Cheong. The investment in BBR not only serves to increase immediate vessel sales but also lays the groundwork for potential future vessel purchases by BBR from the Group amidst positive industry fundamentals in Indonesia. Exposure to more recurrent earnings streams. We keep our full year estimates for Nam Cheong unchanged at this point, though we reckon there could be upside froms better shipbuilding margins as well as growth in recurrent charter income from FY5, especially from the high margin cabotage market in Indonesia. Maintain BUY on Nam Cheong, as valuations remain benign at below 8x FY5F earnings, despite 3% earnings CAGR over FY3-5. At A Glance Issued Capital (m shrs),98 Mkt. Cap (S$m/US$m) 93 / 74 Major Shareholders SK Tiong Enterprise Sdn (%) 7.4 Hung Yung Enterprise Sdn (%) 5.3 Su Kouk Tiong (%) 7.9 Free Float (%) 49.4 Avg. Daily Vol.( ) 7,85 ed: JS / sa: JC

2 Nam Cheong will invest about US$3.7m to hold c.3% of Indonesia-listed OSV player PT BBR. Nam Cheong announced that it has signed an agreement with Singapore-listed Marco Polo Marine to invest in Marco Polo s indirect subisidairy, PT Pelayaran Nasional Bina Buana Raya (BBR). Marco Polo currently holds a 49.% interest in BBR, which operates OSVs including AHTS vessels, tugs and barges in Indonesian waters. Under the agreement, Nam Cheong will subscribe for up to. billion new shares in BBR s rights issue, at an issue price of IDR 3 per share, which is in line with BBR s NAV of IDR 4 per share as of 3 June 4. This will be Nam Cheong s second foothold in the cabotage protected market in Indonesia, after it formed a JV with vessel operator PT BNI last year. Who is BBR? BBR was a tug and barge operator mainly serving the Indonesian coal market. Since the investment by Marco Polo and its listing on the IDX in 3, BBR is now fast emerging as a significant OSV operator in Indonesia. Currently, it has a fleet of about 4 AHTS vessels, with another 4 vessels being built at Marco Polo s Batam shipyard. While earnings YTD in FY4 were affected by low utilisation in the tugs and barges division, the offshore services division has performed well, with long term charters secured for most of its vessels. Going forward, BBR is expected to grow its fleet further to take advantage of the strong fundamentals underpinning the Indonesian offshore services market. BBR will buy 5 vessels worth US$85m from Nam Cheong. The underlying rationale for the transaction is to allow BBR the balance sheet flexibility to expand its fleet through vessel acquisitions from Nam Cheong. BBR will utilise part of the proceeds from the rights issue to purchase five small- and mid-sized OSVs, which are appropriate for plying Indonesian waters, from Nam Cheong for US$85m. The vessels are scheduled for delivery in HFY5 and revenues are likely to be recognised only from Q5 onwards once the fund raising is completed. Management believes that the investment in BBR serves not only to increase immediate vessel sales but also lays the groundwork for potential future vessel purchases by BBR from the Group amidst positive industry fundamentals in Indonesia. Nam Cheong sells another 3 vessels worth US$4m. In addition to the 5 vessels sold to BBR for delivery in 5, Nam Cheong has also secured vessel sale contracts worth US$4m for x 5,5bhp AHTS and x,5 AHTS vessels from repeat customers Vega Offshore (Norway), Vroon (Netherlands) and another emerging Asian player. This brings total vessel sales in September to 8 vessels worth US$m. YTD, Nam Cheong has secured vessel sale contracts worth US$45m, and looks set to exceed last year s record numbers. Orderbook climbs to RM.9bn with these contracts. Vessel sale contracts secured YTD in FY4 Date Buyer Country Value (US$m) Vessels Yard Status 8-Jan Sentinel Marine UK 5. 4 ERRV China Estimated delivery in 5/ 8-Jan Sentinel Marine UK. AHTS China Estimated delivery in 5/ 3-Mar Multi Marine Malaysia. AHTS China 4 3-Mar E.A. Temile West Africa 3.3 PSV China 4 3-Jun Perdana Petroleum Malaysia 84. AWB China -Jul Undisclosed Asia. 3 PSV China 4-5 -Jul Maridive & Oil Services North Africa 3. AWB China 5 9-Sep BBR Indonesia OSVs China 5 9-Sep Various Europe, Asia 4. 3 AHTS China 4 Total 45.3 Page

3 4 Built-to-stock portfolio 5 Built-to-stock portfolio AHTS PSV AWB AHTS PSV AWB Unsold Sold Delivered Unsold Sold Delivered Nam Cheong should continue to deliver in the near to medium term. We expect the demand for small and midsized AHTS and mid-sized PSVs will be sustained in the current market environment. PSVs continue to garner more acceptance in Asian markets as fields move further offshore, and AHTS demand should be boosted by the replacement cycle in the coming years, as a significant portion of existing fleet (close to 3%) are over 5 years age, and not as fuel efficient as new vessels. Currently, only 3 of the vessels in the FY4 programme remain unsold and 9 of the 3 vessels in FY5 programme have been sold already. The fact that Nam Cheong is able to successfully execute on its larger FY4/5 built-to-stock programmes is testament to the steady outlook for the OSV market. Confidence in earnings execution remains, maintain BUY. We keep our full year estimates for Nam Cheong unchanged at this point. Nam Cheong's order book currently stands at RM.9bn, close to record levels, underpinning 3% earnings CAGR over FY3-5. We have yet to factor in recurrent earnings potential from JV/associate investments in the owner/ operator space. Further upside from more built-to-order contracts as the OSV cycle gathers momentum, as well as potentially better margins given that our current gross margin estimates are quite conservative. Despite good earnings execution and sustained vessel sales momentum, valuations appear very attractive at 7.x FY5F PE. Maintain BUY with unchanged TP of S$.5, pegged to x FY4/5F blended earnings. Page 3

4 Key Assumptions # AHTS delivered # PSV delivered # AWB delivered # BTO vessels delivered Segmental Breakdown Revenues (RM m) Shipbuilding ,9,789,87 Chartering More vessels in chartering fleet Total 877,57,89,37 Gross profit (RM m) Shipbuilding Chartering Total Gross profit Margins (%) Shipbuilding Chartering Conservative margin assumptions Total Income Statement (RM m) Revenue 877,57,89,37 Cost of Goods Sold (48) (88) (993) (,5) (,944) Gross Profit Other Opng (Exp)/Inc (33) (45) (57) (75) (87) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc 3 3 Net Interest (Exp)/Inc (5) (8) () (4) (9) Exceptional Gain/(Loss) Pre-tax Profit Tax (8) () 7 (7) (8) Minority Interest () Preference Dividend Net Profit Net Profit before Except EBITDA Growth Revenue Gth (%) (.) EBITDA Gth (%) (.8) Opg Profit Gth (%) (9.) Net Profit Gth (%) (.) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Margins Trend 9.% 8.% 7.%.% 5.% 4.% 3.%.% A A 3A 4F 5F Operating Margin % Net Income Margin % Higher borrowings to support bigger built-to-stock shipbuilding programme Page 4

5 Quarterly / Interim Income Statement (RM m) FY Dec Q3 3Q3 4Q3 Q4 Q4 Revenue Trend 45 4 % Revenue Cost of Goods Sold () (54) (37) (3) (3) Gross Profit Other Oper. (Exp)/Inc () () () () () Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc 3 Net Interest (Exp)/Inc () () (3) (4) (4) Exceptional Gain/(Loss) Pre-tax Profit Tax () (4) () Minority Interest Net Profit Net profit bef Except EBITDA Q Q 3Q 4Q Revenue Q3 Q3 3Q3 4Q3 Q4 Revenue Growth % (QoQ) Q4 5% % 5% % -5% Growth Revenue Gth (%) (7.) EBITDA Gth (%) (7.). (9.) Opg Profit Gth (%) (.) 8.7 (.8) Net Profit Gth (%) (.) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (RM m) Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory ,59 Debtors Other Current Assets Total Assets 9,3,79,49,775 ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder s Equity ,9,357 Minority Interests Total Cap. & Liab. 9,3,79,49,775 Asset Breakdown (3) Inventory - 47.% Debtors -.% Net Fixed Assets - 8.4% Assocs'/JVs -.% Bank, Cash and Liquid Assets -.9% Non-Cash Wkg. Capital 4 7,5,35, Net Cash/(Debt) (99) () (489) (37) (7) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) NA Gearing expected to remain in reasonable range even with higher working capital commitments Page 5

6 Cash Flow Statement (RM m) Pre-Tax Profit Dep. & Amort. 7 3 Tax Paid (9) (5) (7) Assoc. & JV Inc/(loss) () (3) (3) Chg in Wkg.Cap. (5) (3) (49) (37) (3) Other Operating CF (8) () Net Operating CF 37 7 (3) (3) 7 Capital Exp.(net) (7) () (3) (5) (5) Other Invts.(net) (79) Invts in Assoc. & JV (4) () Div from Assoc & JV Other Investing CF Net Investing CF (7) () (7) (5) (5) Div Paid (9) () () (8) Chg in Gross Debt (59) 4 4 Capital Issues 9 Other Financing CF 4 () () Net Financing CF (55) () (8) Currency Adjustments 5 Chg in Cash () 89 5 (48) (5) Opg CFPS (sen) Free CFPS (sen). 3. (.8) (3.9) (.) Capital Expenditure A A 3A 4F 5F Capital Expenditure (-) Dividend payout ratio of 5-3% assumed Target Price & Ratings History S$ S.No. Date Closing Ta rge t Price Price Rating : 3 Sep Buy : 9 Nov Buy 3: 8 Jan Buy 4: 5 Mar Buy 5: May Buy : Jun Buy 7: 9 Jul Buy 8: Aug Buy.5 Sep-3 Jan-4 May-4 Sep-4 Note : Share price and Target price are adjusted for corporate actions. Source: DBS Bank Page