Nam Cheong revenue up 145% YoY

FAIR VALUE: S$0.280

Nam Cheong released a set of very strong results for 2012 Q1, in line with the expectations in our initiation report last month.

- Revenue up 145% YoY to RM190.5m, on the back of more vessels being built and the three AHTS vessels sold this quarter, for which all the work done were recognized.

- Gross margin maintained high at 23%, with the charter fleet delivering its usual high 80% margin, and the ship-building segment posting a good 18%. This represents a more normalized margin compared to the 2011Q1 33% when five vessels were delivered and recognized at once.

- Net profit up 81% to RM33.2m, in line with the revenue growth and the normalized margin. The Q1 profits met 22.9% of our full-year estimate, but actually beats our quarterly expectation as we modeled Q1 to be the slowest quarter to deliver only
20% of full-year performance, since other vessels sold later will add to the revenue recognized.

- Surprise two additions to charter fleet: Nam Cheong added two SSVs to its charter fleet this quarter—both are now on charter and continue to deliver the same 80% gross margin. Though their revenues are barely 5% of ship-building revenues, their 80% gross margin allows them to punch well above their weight to deliver 19% of 2012F gross profit. We like this segment for this high margin and stable profit contributions, and the surprise growth from 10 to 12 vessels lends Nam Cheong greater profit stability.

- Going for a song: Nam Cheong has delivered a stellar start to the year, and we expect the next three quarters to be even stronger with more vessel sales incoming. The stock is currently trading at 5.8x 2012F EPS, almost going for a song compared to STX OSV at 8.2x and the bulk of Malaysian-listed oil & gas names at 10x-26x.

- Maintain FV at $0.280, reiterate BUY: We continue to expect a quantum leap in the EPS this year—where we saw a 56% jump when we initiated coverage. Nam Cheong should continue to outperform at the operational level given the strong oil & gas scene in Malaysia and its 50%-75% market share there, and we advocate accumulating into this stock while the share price massively underperforms relative to the operational achievements. Maintain FV at $0.280, still valuing the shares at an undemanding 9x 2012F EPS. BUY.

Additional Notes

Following the results release, Nam Cheong management revealed the shipbuilding programme for 2012 and 2013. With this new information, we re-modeled our shipbuilding forecasts for the coming years.

The major change was the shift away from our assumed 50-50 split of AHTSPSVs towards a 30-70 share in terms of vessel numbers. As the 3000dwt PSVs are sold for about 175% of the price of a 5,000bhp AHTS, we are now more confident about Nam Cheong’s revenue growth. Further, this allows us to incorporate even more conservative assumptions in our model—fewer large ships and fewer additional vessels in future years.

A mid-sized AHTS costs about 300% that of a small AHTS, and a large PSV about 165% of the smaller version. Nam Cheong has the potential to deliver even larger revenue and bottom line growth if it can build and sell larger vessels, which we is management’s longer-term strategy.