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Nam Cheong Ltd - DBS Research 2016-05-13: Dry spell vaporises revenue visibility

Nam Cheong Ltd - DBS Research 2016-05-13: Dry spell vaporises revenue visibility NAM CHEONG LIMITED N4E.SI 

Nam Cheong Ltd - Dry spell vaporises revenue visibility

  • Net loss of RM40.1m in 1Q16
  • Marked slowdown in construction work; steep fall-off in shipbuilding revenues expected in FY16
  • Charter segment utilisation at c.20%


Maintain our FULLY VALUED call as the situation deteriorates. 

  • 1Q16 saw Nam Cheong registering negative revenues owing to reversal of the cancelled Perdana vessel. Even excluding that, the Group recognised just RM30m in revenues, signalling a sharp slowdown in construction work. 
  • With no vessel sales or order wins year-to-date, and significant reduction in built-to-stock programme, revenue visibility is now very limited. 
  • We lower our FY16 revenues significantly from RM740m to RM128m, as the company has stretched its RM600m orderbook recognition out further, and on lower vessel sales assumptions (we now assume that only two built-to-stock vessels are sold in FY16 and FY17 each). 
  • We are now expecting losses of RM12m in FY16, compared to minor profits previously.


1Q16 in the red again. 

  • Nam Cheong reported a 1Q16 net loss of RM40.1m, on the back of low work volumes and a large foreign exchange loss of RM36.9m during the quarter. 
  • Declines in SG&A expenses and interest costs helped stem the bleeding, though we expect their effect to be only temporary.


Vessel sales will be the key going forward. 

  • At these low orderbook levels, prospects look weak for Nam Cheong. There are currently six unsold vessels each in FY16/17 built-to-stock programme, which will be a challenge. 
  • A rise in oil prices at least above US$60/bbl could catalyse some ordering activity, but we believe that is unlikely in the near term.


Valuation:

  • Given the lack of vessel sale momentum, we believe downside risks prevail for Nam Cheong. 
  • We maintain our FULLY VALUED call with an unchanged target price of S$0.07 per share pegged to 0.3x P/BV. 
  • Dividends are likely to be suspended in a bid to conserve cash amid the current uncertain climate.


Key Risks to Our View:

  • A sharp spike in the oil price – albeit unlikely in our view – could result in some uplift in vessel sales, boosting earnings and the share price.




Suvro SARKAR DBS Vickers | http://www.dbsvickers.com/ 2016-05-13
DBS Vickers SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 0.07 Same 0.07


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