What’s New
• Expect larger-than-forecasted 2014 shipbuilding programme. We believe Nam Cheong could announce a larger-than-previously forecasted 2014 shipbuilding programme. As a result, we increased our 2014 vessel completion forecast to US$450m, from our prior conservative forecast of US$340m. This is compared with US$300m and US$390m worth of vessel completions in 2012 and 2013 respectively. Nam Cheong’s revenue tends to track vessel completions closely as vessels are usually sold 3-6 months before completion.
• Focus on shallow-water, mass-market products. We expect Nam Cheong will continue to focus on shallow-water, mass market vessels in
2014, which are highly marketable and widely accepted by oil majors globally.
• Vessel sales on track. To date, Nam Cheong has already sold 9 of the 19 BTS vessels to be completed in 2013, and 2 of the vessels to be completed in 2014. The group has yet to announce its shipbuilding programme for 2014.
• Expect 75% yoy profit growth. We forecast 4Q12 net profit of RM46.3m, up 75% yoy and 47% qoq. Growth will be driven by higher revenue from vessel sales, bulk of which is booked at the point of sale. In 4Q12, Nam Cheong sold 9 build-to-stock (BTS) vessels worth US$153m, compared with US$28m and US$103m in 4Q11 and 3Q12 respectively.
• 0.3 S cents per share dividend forecast. We expect full-year dividend of 0.3 S cents per share, implying yield of 1.1%. We have assumed a payout ratio of 10%.
Stock Impact
• Placement of 190m new shares. Nam Cheong has raised S$48.5m (RM121m) via the issuance of 190m new shares, representing 9.9% of the existing issued share capital. 70-90% of the net proceeds will be used to finance shipbuilding projects and vessel chartering, while 10-30% will be used to refinance borrowings. As a result, we expect net gearing to fall from 93.7% in 2012 to 71.0% in 2013. We have already factored in an enlarged share base arising from the placement.
Earnings Revision/Risk
• Increased profit forecast. We maintain our 2012 earnings forecast. However, we raised both our 2013 and 2014 profit forecast by 13% and revenue by 10%, accounting for higher-than-previously expected vessel completions in 2014. In addition, we have factored in an enlarged share base arising from the issuance of 190m new shares.
• Risk: Nam Cheong is unable to sell its BTS vessels. However, this risk is low as we are currently at the bottom of a new OSV building upcycle.
Valuation/Recommendation
• Maintain BUY with higher target price of S$0.34 (previously S$0.30), implying 28.3% upside. We rolled over our valuation basis to 2014, pegged at an unchanged target PE of 9.7x (2014F EPS: 8.8 sen or 3.5 S cents). Our target PE is 1.3SD above peers’ long-term PE mean of 7.0x, which we think is justified given Nam Cheong’s dominant 50-75% market share in a high barrier-to-entry market.
Share Price Catalysts
• Sale of BTS vessels.
• Roll-out of a larger-than-expected ship completion programme for 2014.
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