01-Mar-12 02-May-12 03-Jul-12 03-Sep-12 02-Nov-12 03-Jan-13 OSK Research 01 Mar 2013 SINGAPORE EQUITY Investment Research Lee Yue Jer 65 6232 3898 yuejer.lee@sg.oskgroup.com Jason Saw 65 6232 3871 jason.saw@sg.oskgroup.com 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) 0.29 0.16 3m ADT SGD3.99m YTD Returns -1.9% Beta (x) 1.30 Share Performance (%) Month Absolute Relative 1m 0 0.1 3m 13 4.4 6m 30 22.4 12m 47.7 37.6 6-month Share Price Performance 0.30 0.25 0.20 0.15 0.10 Source: Bloomberg Price Close Relative to Singapore Straits Times (RHS) 170 150 130 110 90 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
OSK Research 01 Mar 2013 Figure 1 S-Curve revenue recognition model for forecast building programme ID Delivery by year Status Price (US$ '000) 2011 2012F 2013F 2014F 2015F 2011 1101 AHTS Delivered 11,500 1,150 1102 AHTS Delivered 11,500 1,150 1103 AHTS Delivered 11,500 1,150 1104 AHTS Delivered 11,500 9,200 1105 AHTS Delivered 11,500 9,775 1106 AHTS Delivered 11,500 11,500 1107 AHTS Delivered 14,000 13,500 1108 AHTS Delivered 26,000 26,000 1109 AHTS Delivered 36,000 3,600 1110 MPSV Delivered 27,000 810 1111 MPSV Delivered 29,100 29,100 1112 AWB Delivered 27,000 810 1113 AWB Delivered 27,000 5,400 2012 1201 AHTS Delivered 11,500 9,890 1,150 1202 AHTS Delivered 12,667 2,533 10,133 1203 AHTS Delivered 12,000 3,120 8,880 1204 AHTS Delivered 12,800 12,800 1205 AHTS Delivered 22,000 13,200 8,800 1206 AHTS Delivered 11,500 2,990 8,510 1207 AHTS Delivered 12,667 1,520 11,147 1208 AHTS Delivered 12,000 12,000 1209 AHTS Delivered 12,000 12,000 1210 AHTS Delivered 11,900 11,900 1211 PSV Delivered 20,000 16,000 4,000 1212 PSV Delivered 20,000 3,200 16,800 1213 AWB Delivered 27,800 16,680 11,120 2013 1301 AHTS Stock 32,000 32,000 1302 AHTS Stock 11,500 11,500 1303 AHTS Delivered 12,667 1,900 10,767 1304 AHTS Delivered 11,900 11,900 1305 AHTS Order Book 11,283 2,933 8,349 1306 AHTS Order Book 11,500 2,300 9,200 1307 AHTS Order Book 11,500 1,725 9,775 1308 AHTS Order Book 11,283 2,933 8,349 1309 AHTS Stock 11,500 11,500 1310 PSV Order Book 20,000 16,000 4,000 1311 PSV Stock 20,500 20,500 1312 PSV Stock 20,500 20,500 1313 PSV Stock 20,500 20,500 1314 PSV Order Book 20,010 3,202 16,808 1315 PSV Delivered 30,000 2,700 27,300 1316 PSV Delivered 33,400 30,060 3,340 1317 PSV Order Book 32,100 31,137 963 1318 AWB Order Book 29,500 10,325 19,175 1319 AWB Order Book 29,500 10,325 19,175 OSK Research See important disclosures at the end of this report 2
OSK Research 01 Mar 2013 All stock vessels below assumed sold 2 to 4 quarters before completion 2014 1401 AHTS Order Book 11,283 451 9,703 1,128 1402 AHTS Order Book 11,283 2,933 8,349 1403 AHTS Stock 11,200 11,200 1404 AHTS Stock 11,200 11,200 1405 AHTS Stock 11,200 11,200 1406 AHTS Stock 20,000 5,200 14,800 1407 AHTS Stock 30,000 30,000 1408 AHTS Stock 20,000 20,000 1409 AHTS Stock 20,000 16,000 4,000 1410 AHTS Stock 20,000 3,200 16,800 1411 AHTS Stock 20,000 5,200 14,800 1412 PSV Stock 19,000 19,000 1413 PSV Stock 19,000 19,000 1414 PSV Stock 19,000 19,000 1415 PSV Stock 19,000 3,040 15,960 1416 PSV Stock 19,000 19,000 1417 PSV Stock 19,000 19,000 1418 PSV Stock 19,000 19,000 1419 PSV Stock 19,000 4,940 14,060 1420 PSV Stock 30,000 29,100 900 1421 PSV Stock 30,000 30,000 1422 AWB Stock 29,500 27,730 1,770 1423 AWB Stock 29,500 23,600 5,900 1424 AWB Stock 29,500 26,550 2,950 1425 AWB Stock 29,500 29,500 2015 1501 AHTS Stock 11,200 10,080 1,120 1502 AHTS Stock 11,200 2,912 8,288 1503 AHTS Stock 11,200 11,200 1504 AHTS Stock 20,000 20,000 1505 AHTS Stock 20,000 20,000 1506 AHTS Stock 11,200 8,960 2,240 1507 AHTS Stock 11,200 11,200 1508 AHTS Stock 11,200 11,200 1509 AHTS Stock 11,200 11,200 1510 AHTS Stock 11,200 11,200 1511 PSV Stock 19,000 19,000 1512 PSV Stock 19,000 19,000 1513 PSV Stock 19,000 19,000 1514 PSV Stock 19,000 19,000 1515 PSV Stock 19,000 18,430 570 1516 PSV Stock 30,000 30,000 1517 AWB Stock 29,500 29,500 1518 AWB Stock 29,500 29,500 1519 AWB Stock 29,500 29,500 1520 AWB Stock 29,500 29,500 1521 PSV Order Book 32,500 9,750 21,775 975 1522 PSV Order Book 32,500 3,575 26,975 1,950 1523 PSV Order Book 32,500 3,900 28,600 1524 PSV Order Book 32,500 2,925 29,575 2011 2012F 2013F 2014F 2015F Model Revenue (US$ '000) 186,878 294,173 386,156 454,474 580,814 USD-RM 3.13 2.95 3.05 3.05 3.05 Model Rev (RM '000) 584,366 866,879 1,177,775 1,386,147 1,771,483 Actual Rev to date (RM '000) 564,595 839,015 Variance 3.50% 3.32% OSK Research See important disclosures at the end of this report 3
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