CIMB Securities 2015-08-14: Nam Cheong Limited - In Drydock. Upgrade to HOLD.

NAM CHEONG LIMITED N4E.SI

In drydock

At 21% of our FY15 forecast, 1H core net profit of RM53m (57% yoy) trailed our expectation and consensus.
The negative deviation sprang from lower than-expected order book recognition as the group only delivered one vessel 2Q vs. five in 2Q14.
We cut our FY15-17 EPS by 33-43% as we lower our vessel sale expectations.
We also lower our target price (S$0.22), now based on 1x CY15 P/BV (7.5x CY16 P/E prev.).
We upgrade the stock to a Hold as its share price has plunged recently.
That said, we concede that the murky order pipeline implies earnings downside risks.
This and that yards are generally a later beneficiary of an oil price recovery mean that we might not turn truly constructive on the stock for some time.
Negative triggers could come from flagging sales.

Shipbuilding revenue fell 50% yoy and 42% qoq on lower vessel deliveries.
Nam Cheong only delivered one vessel in 2Q15 vs. six in 1Q15 and five in 2Q14. Also, the pushback of some vessel deliveries means a slower-than-expected order book recognition rate.
Owing to higher build-to-order sales mix and operating burden, shipbuilding gross margins plummeted to 15.3% (1Q15: 20%, 2Q14: 17%).
However, we believe that the margin swing is really a function of the lower revenue base and should be relatively stable on a longer timeframe.
Nam Cheong achieved 18.3% gross margins for 1H15 vs. our expectation of 17%.

With market conditions expected to remain challenging, we now cut our vessel-sale expectations for FY16 to six; and 10-12 for FY6-17.
YTD, Nam Cheong has only sold two vessels. The expected level of sales for FY16-17 will be similar to 2010-11, the preceding years of the GFC.
It was only in 2012 or three years after the crisis whereby Nam Cheong's sales started to accelerate.
Another implication of our assumptions is that Nam Cheong will be stuck with 12 unsold vessels from its FY15-16 ship delivery programme.
There could be some carrying costs from the perspectives of both earnings and capital.

We sense that there will not be any vessel sales in 3Q and concede that there are downside risks to our forecast.
This and that yards are generally a later beneficiary of an oil price recovery mean that we might not turn truly constructive on the stock for some time.

YEO Zhi Bin | http://research.itradecimb.com/ CIMB Securities 2015-08-14

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