Nam Cheong - CIMB Research 2015-11-16: From record breaker to heart breaker

NAM CHEONG LIMITED N4E.SI

Nam Cheong - From record breaker to heart breaker

With both shipbuilding and ship chartering disappointing, 3Q15 core net profit was below consensus and our expectation. 9M core profit made up 39% of our FY15.
Studying its debt maturity profile, we believe that Nam Cheong should be able to tide through the downturn.
Our main concern, however, is its interest coverage as EBITDA has fallen off the cliff.
We scale down our vessel sales and margins assumptions.

Downgrade to Reduce with a lower target price (S$0.11), now based on 0.5x CY16 P/BV.

Nam Cheong’s 3Q15 core net profit of RM3.1m (-98% yoy; -57% qoq) was below consensus and our expectation. Both shipbuilding and ship chartering disappointed.
Shipbuilding turnover decreased 69% yoy to RM182m as the group delivered two vessels in 3Q15 (3Q14: six vessels). Also, customers such as Bumi Aramda and Petra Perdana are deferring deliveries.
Shipbuilding gross margins fell 1% pts to 14.3% owing to operating burden and higher build-to-order sales mix (9M15: 17.2% vs. 9M14: 21%).

Ship chartering revenue fell 42% yoy and 47% qoq to RM7m on weaker utilisation. Fleet utilisation for 3Q15 was around 40%. As a result of the operating burden, ship chartering was loss-making.
With one particularly costly PSV still down, we expect ship chartering to be loss-making for 4Q15, which could potentially reverse 1H15’s profits.

With its S$75m 6.5% 3-year bond and longer cash conversion cycle, Nam Cheong’s net gearing rose to 1x in 3Q15 (FY14: 0.4x). It incurred RM216m operating cash outflow in 9M15.
On redemption of its S$110m 6% 3-yr note in Nov, we expect net gearing to fall to 0.6x at end-15. With a well-spaced out debt maturity profile (plus undrawn committed bank lines), we think Nam Cheong should be able to survive the downturn.
Our concern is its interest coverage covenant as Nam Cheong’s EBITDA has fallen off the cliff.

YTD, Nam Cheong has only sold two vessels; and we do not expect any more sales for 2015. We expect Nam Cheong to sell six of the eight unsold vessels which were meant for 2015 in 2016; and ten vessels in 2017.
With selling prices coming down, we now forecast gross margins of 16% (prev. 17%). These have led to 52-60% cuts for FY15-17 EPS and 80% cuts in FY15-17 DPS. We now expect 0.2Scts DPS (prev. 1Scts).

From three consecutive record-breaking years in terms of vessel sales and earnings (2012-14), Nam Cheong has now the unenviable record of breaching its worst performance. Its previous worst performance was in GFC (2009) when it sold four vessels.
On the premise of “lower-for-longer” and that vessel sales are unlikely to recover, we downgrade the stock to Reduce, with a lower target price, now based on 0.5x CY16 P/BV, as we roll over to end-16 target valuation (prev. 1x CY15 P/BV).

YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2015-11-16

CIMB Securities SGX Stock Analyst Report REDUCE Downgrade HOLD 0.11 Down 0.22