RHB Securities 2015-08-17: Nam Cheong Limited - 2Q15; Staying Profitable In Worst-Case Scenario. Maintain BUY.

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NAM CHEONG LIMITED N4E.SI

Staying Profitable In Worst-Case Scenario

• Nam Cheong reported 2Q15 PATMI of only MYR10.7m due to slow revenue recognition and a lumpy MYR7m marketing expense charge. 
• Maintain BUY, with a lower SGD0.24 (25% upside, from SGD0.40) TP based on a 1.2x FY15F P/BV. The stock has priced in the worst-case scenario. 
• We believe this asset-light company deserves a small premium over BV for its flexible-capacity strategy and cost-leader industry position. 

 Seasonally weakest quarter. 

• Its profit recognition is seasonally weakest in 2Q, as fewer vessels tend to be scheduled for delivery this period (one in 2Q15 vs six in 1Q15, vs nine sold and scheduled for delivery in 2H15). 
• We expect the two small anchor-handlers and the accommodation work-barge to be sold in 2H15, but the platform supply vessels to be deferred, for stronger QoQ performances. 

 Improving enquiries. 

• Nam Cheong is starting to see more enquiries, which were “almost non-existent” in 1H15, for vessels. 
• Management stated that clients have begun finding short-term jobs “with a few longer-term (one-year) contracts being signed in Malaysia”. Though there have been no major improvements in charter rates, the trend is “improving”. 

 Taking on a highly conservative stance. 

• We were wrong in forecasting the shallow-water market to turn around in 2H15. We now adopt the following highly-conservative assumptions: 
  1. 5/13 vessel sales for FY15F/FY16F, deferring deliveries of 5/10 vessels in these periods, 
  2. cutting gross margin assumptions to 15% (from 16.5%) which is the bottom of the guided range, 
  3. resulting in delivery schedules of 19/25/22 for FY15F-17F from 24/30/30. 
• As such, we slash earnings by 56%/53% for FY15F/FY16F and introduce our FY17F numbers. 

 Still profitable in FY15F even if no vessels are sold. 

• In the worst-case scenario, ie Nam Cheong sells no vessels in 2H15, our FY15 bottomline forecast would fall to c.MYR75m. The situation today is analogous to the FY09 global financial crisis, during which Nam Cheong sold four vessels, before sales rebounded to 10/13/21 units in subsequent years. 
• The stock currently trades at its BV, which is in value territory for this asset-light industry cost-leader. 
• We believe its “Asian-ised”, low-cost standardised vessels will continue to see customer demand in this environment – where only the lowest-cost operators can thrive.

Lee Yue Jer CFA | http://www.rhbgroub.com/ RHB Securities 2015-08-17

BUY Maintain BUY 0.24 Down 0.40