Nam Cheong - Maybank Kim Eng 2015-11-16: Brace for a longer winter

Nam Cheong Limited - OCBC Investment 2015-11-13: Marginally Profitable in 3Q15 NAM CHEONG LIMITED N4E.SI 

Nam Cheong - Brace for a longer winter 

  • 3Q15 just broke even, missing expectations. Shipbuilding and vessel chartering were weaker. Cut FY15-17E by 34-66%. 
  • Likely to see an order drought in a sustained OSV downturn. 
  • Maintain SELL, TP cut from SGD0.17 to SGD0.12, now based on 0.5x FY16 P/BV. 

What’s New 

  • 3Q15 broke even, missing expectations. 9M15 PATMI of MYR49.5m formed only 42% of both our and consensus’ FY15E. The weak 3Q15 was due to: 
    1. lower shipbuilding revenue with only 2 vessels delivered (2Q15: 2, 3Q14: 6) and no new vessel sales, 
    2. lower shipbuilding gross margin of 14.3% (2Q15: 15.3%, 3Q14: 24.0%) due to higher proportion of lower-margin build-to-order vessels and 
    3. MYR5.0m gross loss in the vessel chartering segment due to poor utilisation. 

What’s Our View 

  • We believe that Nam Cheong could face a long order drought in a sustained OSV downturn. 
  • Second-hand vessels may be readily available at lower prices, especially from weak and desperate OSV owners. 
  • Nam Cheong still has eight unsold vessels under its 2015 shipbuilding program and 18 unsold for 2016. Vessels which were sold are also likely to see deliveries deferred. This will result in slower revenue recognition and cash collections. 
  • Fortunately, Nam Cheong’s sub-contracting model to third-party government-owned Chinese yards, allows it to also defer payments to the yards. 
  • Its net orderbook stood at MYR880m as at 3Q15 where it said ~25% would be recognised in 4Q15. 
  • We cut FY15-17 EPS by 34-66% as we now assume that it can only sell four out of its 26 unsold vessels in 2016 and the remaining to be deferred to 2017 and beyond. 
  • Net gearing at 9M15 was 0.97x but it said it just paid off SGD110m (~MYR330m) of its MYR1.9b debt and short-term debt now stands at ~MYR500m. 
  • We cut TP from SGD0.17 to SGD0.12 as we lower our P/BV valuation multiple from 0.7x to 0.5x. 
  • Maintain SELL.

Yeak Chee Keong CFA Maybank Kim Eng | 2015-11-16
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 0.12 Down 0.17