NAM CHEONG LIMITED
N4E.SI
Nam Cheong Ltd - Depleting orderbook clouds visibility
- Reports minor net profits of RM2.6m in 2Q16 on higher revenue recognition this quarter.
- Profitability may not be sustained as net orderbook declines to RM490m.
- Ability to meet debt repayment schedules over FY17-19 remains suspect.
Maintain our FULLY VALUED call as outlook remains bleak.
- As oil prices languish and the OSV oversupply situation worsens, multiple headwinds confront the builder of largely speculative vessels.
- Firstly, the net orderbook level is declining fast (~RM490m as of 2Q16) and the order win outlook is dismal, hence providing limited visibility to revenues and earnings.
- Secondly, its unencumbered cash balance is quite low at just RM137m as of 2Q16, while operating cash flows have been negative for five out of the last six quarters.
- Finally, Nam Cheong has three notes maturing in 2017/18/19 with total principal value of approximately RM1bn.
- The silver lining is that the company has around RM1bn in untapped credit facilities and an estimated RM580m in cash is expected from deliveries over FY16/17. Thus, liquidity risk will eventually depend on whether the company be able to draw down on these credit lines and whether deliveries proceed on time.
- Overall, we believe risks outweigh rewards at this point; thus we maintain FULLY VALUED with a lower TP of S$0.04.
Minor profits reported in 2Q16, but may not be sustainable.
- Nam Cheong reported a 2Q16 net profit of RM2.6m as shipbuilding work volume and hence revenues of RM117m were higher q-o-q, but we expect a slowdown in 3Q/4Q16 as the orderbook depletes.
Tweaking our earnings downward.
- We are lowering our earnings estimates to account for a weaker-than-expected charter segment earnings and changes to our delivery timeline assumptions. We now expect higher losses of RM81m/22m in FY16/FY17 respectively.
Valuation
- Given the lack of vessel sale momentum and upcoming bond maturities, we believe downside risks prevail for Nam Cheong.
- We maintain our FULLY VALUED call with a lower target price of S$0.04 per share pegged to 0.2x P/BV – the lower end of peer valuations of 0.2-0.3x.
Key Risks to Our View
- A sharp spike in the oil price could result in some uplift in vessel sales, boosting earnings and the share price.
Suvro SARKAR
DBS Vickers
|
Singapore Research Team
DBS Vickers
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http://www.dbsvickers.com/
2016-08-12
DBS Vickers
SGX Stock
Analyst Report
0.04
Down
0.070
