Nam Cheong Ltd - DBS Research 2016-11-11: Balance sheet will be tested

Nam Cheong Ltd - DBS Vickers 2016-11-11: Balance sheet will be tested NAM CHEONG LIMITED N4E.SI

Nam Cheong Ltd - Balance sheet will be tested

  • Core losses of R M11.4m in 3Q16.
  • Sharp drop in revenues from shipbuilding segment.
  • Operating cash flows remain negative for third consecutive quarter.


Maintain our FULLY VALUED call as outlook remains bleak.

  • With just two deliveries so far this year and no order wins since early 2015, the outlook for the OSV shipbuilder remains bleak, as it continues to draw down its orderbook while enduring negative operating cash flows (negative c.RM280m in 9M16). 
  • In the near term, current debt maturities total RM900m (as of 3Q16), of which c.RM260m is attributable to the August 2017 MTN. These must be refinanced with a combination of cash from deliveries (which could total RM500-600m, assuming no slippages) and additional drawdowns of credit facilities (which we estimate to be around RM800m). But there is risk to both these sources of cash, as owners in general continue to push back delivery dates and undrawn credit facilities are subject to lenders’ risk tolerance. 
  • Nam Cheong’s three note maturities in FY17/18/19 of S$90m/S$75m/S$200m present major liquidity hurdles, in our view. 
  • Overall, we believe risks outweigh rewards at this point; thus we maintain our FULLY VALUED call with an unchanged TP of S$0.04.


Slowdown in shipbuilding drove core losses of RM11.4m in 3Q16. 

  • The shipbuilding segment’s revenues were low at just RM16m as construction work was slow during the quarter, though lower COGS helped keep the segment profitable at the gross profit level. 
  • The charter segment saw a better q-o-q revenue performance but is still making gross losses on low charter rates. EBIT was thus a negative RM6.6m, but a forex gain of c.RM12.2m helped push headline profits into the black.


Expect FY17 to remain lacklustre. 

  • As shipbuilding activity continues to decelerate and certain vessels have their deliveries pushed back, we have lowered our forecasts, now expecting RM290m in revenues for FY17 (vs. RM390m previously) and net losses of RM34m (vs. RM22m previously).

Valuation

  • We maintain our FULLY VALUED call with a TP of S$0.04 per share pegged to 0.2x P/BV – the lower end of peer valuations of 0.2-0.4x.

Key Risks to Our View

  • A sharp spike in the oil price could result in some uplift in vessel sales, boosting earnings and the share price.




Suvro SARKAR DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-11-11
DBS Vickers SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 0.040 Same 0.040




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