Nam Cheong valuations look very attractive currently

2014 and 2015 work programmes bigger than expected.
According to the latest guidance from management, the FY14/15 shipbuilding programmes consist of 30 and 35 vessels respectively, including built-to-order vessels. We estimate the built-to-stock programme target for both FY14/15 is likely to be around 28 vessels, worth about US$560-570m per year, higher than our existing estimate of 25 vessels worth about US$520m per year. The larger built-tostock programmes envisaged by Nam Cheong are testament to the improving outlook for the OSV market.

Offshore support vessel upcycle firmly in place; Malaysia O&G capex a key driver. Buoyed by the scheduled doubledigit growth in global offshore rig fleet over the next two years, combined with declining OSV orderbook-to-fleet ratios, OSV demand trends look positive. Industry capex momentum continues to be strong, especially in Malaysia, and we expect Nam Cheong to also benefit strongly from the replacement demand for small size AHTS and mid size PSV segments as owners seek to take advantage of higher day rates by purchasing vessels outright from a built-to-stock shipbuilder, without having to wait 1-2 years for a built-to-order vessel.

In a sweet spot, earnings and target revised up, maintain BUY. Nam Cheong's net orderbook stood at RM1.4bn in February 2014, close to record levels, underpinning 21% earnings CAGR over
FY13-15. As we factor in the expanded built-to-stock programme, we revise up our FY14/15 net profit estimates by 7-9%. Further upside from built-to-order contracts and margin outperformance are likely. Despite good margin execution and dividend rewards in FY13, the stock consolidated after a record set of FY13 results. Valuations now appear very attractive at 7x FY14 PE and close to 4% FY14 dividend yield. Maintain BUY with higher TP of S$0.46, pegged to 10x FY14 earnings.