NAM CHEONG LIMITED
N4E.SI
Nam Cheong (NCL SP) - Winter Soldier, Soldiering On
- Nam Cheong’s 3Q15 PATMI was at breakeven as revenue recognition slowed with fewer vessels on the steep part of the S-curve.
- Downgrade to Neutral with SGD0.175 TP based on 0.8x P/B.
- We continue to believe the business model is viable, given long-term demand remains intact. However, the variance of estimates has now grown too large – any vessel sales would generate a revenue spike since vessels are farther along their completion stages.
A slow quarter.
- This quarter was slower as fewer vessels were completed and delivered, and there were also fewer vessels on the steep part of the S-curve.
- A higher mix of build-toorder vessels in the order book took the shipbuilding margin down to 14.3% from 15.3% in 2Q15.
- Management guides that 25% of the MYR880m net orderbook will be recognised in 4Q15 (implying higher shipbuilding revenue than 3Q15’s MYR182m) with the rest in FY16.
- When queried, management revealed that the market prices of its assets are still above costs, and no impairment to the book value is necessary.
Business model built for winter, enquiries up in 4Q15.
- Describing Nam Cheong as a “winter soldier”, management remains confident that its business model will be the first to benefit in the eventual upturn, given that build to order yards will not have a ready stock to meet demand when it returns. This is in line with our views of the business, in general.
- Internal stress tests indicate that the business can be “sustained for a prolonged period on low or no orders”.
- They also reported a higher level of enquiries in 4Q15, “perhaps because oil majors have leftover budgets unspent after too much knee-jerk [in freezing capex]”.
Any sales could cause a significant revenue spike now.
- Based on Nam Cheong’s accounting practices, the sale of a USD30m vessel near completion would result in revenue recognition of MYR100m-130m, with a significant impact on the bottomline. Because of this, the variance of estimates has grown too large for consistent estimation.
- We model for the sale of eight USD20m vessels in FY16F, with half the forecast revenue already in next year’s order book.
- Given the weak sales outlook, we slash estimates 50%/45%/28% for FY15-17F and downgrade the stock to NEUTRAL as investors have other choices with higher earnings visibility.
- Our 0.8x P/B basis is conservative given Nam Cheong’s capacity-light model, and because long-term demand remains intact.
Eugene Chua
RHB Research
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http://www.rhbinvest.com.sg/
2015-11-16
RHB Research
SGX Stock
Analyst Report
0.175
Down
0.24
