OCBC Securities 2015-08-14: Nam Cheong Limited - 2Q15; Waiting for new vessel sales. Maintain SELL.


Waiting for new vessel sales 

 Earnings below expectations 
 No new vessel sales in 2Q 
 SELL on valuation grounds 

Weak 2Q15 results 

Nam Cheong reported a 49% YoY fall in revenue to RM192.7m and an 83% drop in net profit to RM10.7m in 2Q15, such that 1H15 net profit only accounted for 24% and 23% of ours and the street’s full year estimates, respectively. This was mainly due to a reduction in shipbuilding revenue because of lower progressive recognition of revenue from the sale of PSVs. Vessel chartering revenue also fell 42% to RM13.5m in 2Q 2015, mainly due to lower utilisation rates. Gross profit margin for the shipbuilding segment was lower at 15.3% in 2Q15 vs. 24.0% in 2Q14, but in line with management’s guidance of 15- 20%. 

Market remains quiet 

There were no vessel sales in 2Q15, and there are few transactions in the market, though management has seen more enquiries for its vessels so far in 3Q15. The group still has eight unsold vessels for this year under its shipbuilding programme, of which five are PSVs, two are AHTS vessels and the remaining one is an accommodation work barge. Should the offshore market (especially the PSV segment) fails to pick up, we will not be surprised to see more deferments in delivery schedules for the vessels. Nam Cheong’s good working relationship with Chinese yards that are relatively well-funded allows for such operational flexibility. 

Cutting earnings estimates 

As at end 2Q15, the group had an order book of about RM1.5b, of which RM1.0b remains unrecognised (~50% to be booked this year). Meanwhile, Nam Cheong’s share price has lost about 37% of its value since we downgraded our rating to SELL in mid-May. As the market outlook remains dim, we cut our earnings estimates by 25%/40% for FY15/16F and roll forward our valuation, such that our fair value estimate drops from S$0.27 to S$0.17, based on 7x blended FY15/16 earnings. Maintain SELL on valuation grounds.

Low Pei Han | http://www.ocbcresearch.com/ OCBC Investment Research 2015-08-14
SELL Maintain SELL 0.17 Down 0.27