Nam Cheong gearing up for faster growth

· Proposes placement of ordinary shares for S$47m
· Follows S$110m MTN issuance in Nov 2012
· Sufficient upside for existing shareholders

S$47m placement for ordinary shares
Nam Cheong has proposed to issue 190m new ordinary shares at S$0.255 per share (or 10% discount to pre-deal closing price). If successful, its ordinary share capital will be enlarged by about 10%. After deducting fees, the net proceeds of S$47m will be used for
(i) shipbuilding projects and vessel chartering business (70-90%) and
(ii) refinancing existing borrowings and other general corporate purposes (10-30%).

Second fund-raising in three months
We note that the proposed placement comes right after its recent MTN issuance. In Nov 2012, Nam Cheong issued S$110m of notes (6% fixed rate, due 2015) for general corporate purposes. Together with the MTN issuance (and assuming the placement shares are fully taken up), the group would have raised close to S$160m (or ~RM400m). We believe this is mainly to fund a rapid expansion in its
FY14F shipbuilding programme. Demand for offshore vessels is expected to be robust over the medium term horizon driven by Petronas’ massive RM300b capital expenditure programme.

What about shareholders’ interests?
Yet, shareholders should also worry about the dilution of their interests post-placement. Unlike debt, equity is a very expensive form of capital and therefore demands a higher rate-of-return. Assuming a rapid expansion of its shipbuilding and vessel chartering business (using proceeds from the placement), Nam Cheong’s return on average equity (ROAE) would increase to around 23% for FY13-14F, compared to 22% for FY11-12F. Its EPS – after adjusting for the placement shares – is expected to grow by about 20% CAGR, and may provide the catalyst to re-rate from the current 8x fwd PER. All considered, there is still plenty of upside for shareholders despite the 10% dilution in their interest. We adjusted our model to incorporate the proposed placement but prefer to keep our BUY rating and S$0.30 FV unchanged ahead of its FY12F results next month.