Nam Cheong - Cyclical low could drag on
- Still no sign of new orders, existing orderbook depleted further to RM430m.
- Losses expected to continue in FY17/18.
- S$90m note repayment in August 2017 imminent worry, two more note maturities in FY18/19.
Maintain FULLY VALUED as no turnaround in sight.
- With no new orders since March 2015, negative operating cash flows of RM291m for FY16, continuing trend of order cancellations, and a still-oversupplied OSV market, the outlook remains bleak for Nam Cheong.
- Current maturities of RM670m of bank debt and three note maturities in FY17/18/19 of S$90m/S$75m/S$200m present major liquidity hurdles, in our view. These must be financed with a combination of cash from deliveries (which could total RM500-600m across FY17/18, assuming no further cancellations) and additional drawdowns of credit facilities (of ~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.
- We continue to believe the stock’s risk-reward profile is skewed to the downside, and maintain our FULLY VALUED call with an unchanged TP of S$0.04.
Shipbuilding activity remains slow; net losses of RM5.6m recorded in 4Q16.
- Core shipbuilding revenue was around RM40m for the quarter – way below pre-crisis levels of c.RM200-500m – and the orderbook is slowly being drawn down with no replenishment, now standing at RM430m.
- Meanwhile, the charter segment reported its sixth consecutive quarterly gross loss. Thus we expect net losses to persist for Nam Cheong as revenue is not sufficient to cover operating and finance costs.
Forecasts lowered on Perdana cancellation and vessel deferrals.
- We are lowering our revenue forecasts for FY17/18 on the back of cancellation of Perdana’s second AWB and further push-back of the existing delivery schedule for vessels on order; we now expect core net losses of RM45m/42m in FY17/FY18.
- 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.
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.