Nam Cheong Limited - OCBC Investment 2016-02-25: Dragged By BBR Associate

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NAM CHEONG LIMITED N4E.SI 

Nam Cheong Limited - DRAGGED BY BBR ASSOCIATE 

• BBR impairs tugs, barges 
• No OSV impairments 
• Another tough year ahead 

FY15 results marred by associate 

• Nam Cheong reported a 54% YoY fall in revenue to RM241.8m and a net loss of RM21.5m in 4Q15, bringing full year net profit to RM28.5m. 
• At 12.4%, gross profit margin in 4Q15 was comparable to 3Q15’s 11.2%, but what dragged profits down was a RM22.7m share of loss in associate due to lower vessel utilisation rates. 
• We understand that it was BBR (Indonesian collaboration with Marco Polo Marine) that contributed to the loss, mainly from impairment of its tugs and barges. 

Recall that Nam Cheong invested US$30.7m to obtain a 30% stake in BBR in 4Q14. 

• Hardly any impairments done, save for BBR Unlike other O&M companies, the group did not see any significant impairment in inventories or receivables in the 4Q15, as management said that most of the assets in its inventories are still “above water”.
•  The OSV market has also been quiet with few transactions in the past year, which could also add onto the challenge of vessel valuation. 
• In terms of order wins, Nam Cheong sold only two vessels worth RM212m in FY15 vs. 27 vessels worth RM1.8b in FY14. 

FY16 shipbuilding programme reduced from 30 to nine 

• As for its shipbuilding programme, it has deferred even more vessels with the Chinese yards, such that it will only be delivering nine vessels in 2016 from the original 30 vessels that were planned. Out of these nine vessels, four have been sold and five are unsold. 
• According to management, the yards did not charge Nam Cheong penalties for the deferments. 
• For FY17, the group is looking to deliver about 14 vessels. 

FY16 another tough year 

• As of FY15, Nam Cheong had an order book of RM1.2b (17 vessels), of which RM630m remained unrecognised; about half of this is to be booked this year, 25% in FY17 and the remaining 25% in FY18. 
• As Nam Cheong’s customers such as the OSV charterers still hold a pessimistic view of the market, we do not see a recovery in new orders soon. 
• Due to a reallocation of resources, we now CEASE COVERAGE on the stock.

Low Pei Han CFA OCBC Securities | http://www.ocbcresearch.com/ 2016-02-25

OCBC Securities SGX Stock Analyst Report CEASE Maintain SELL 99999 Down 0.14