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Monday, May 19, 2014

CIMB lifts earnings forecast and target price of Nam Cheong (to 44 cents)


CIMB lifts earnings forecast and target price of Nam Cheong (to 44 cents)

yeozhibinAnalyst: Yeo Zhi Bin (left)
At 27% of our FY14 estimate, 1Q14 core earnings of RM65.5m (1.2x higher yoy) was 22% above our expectation (vs. 24% above consensus). The positive variance springs from better-than-expected shipbuilding margins. 

We lift our FY14-16 core EPS by 7-16% to factor in the higher margins and upsized 2015 delivery programme. This causes our target price, still based on 8x CY15 P/E (on par with the peer average), to rise. We keep our Add call, with catalysts coming from stronger-than-expected vessel sales and earnings.

2015 delivery programme unveiled 
Nam Cheong has unveiled details for its 2015 delivery programme – it aims to deliver 35 vessels in that year (vs. 30 in 2014). 

We note the slant towards 6,000 bhp AHTS (~40% of the programme and a successor to the 5,000 bhp AHTS), which is touted by industry watchers to be the workhorse of the near future. In our view, this reflects Nam Cheong’s ability to keep its ears close to the ground and read vessel trends accurately. 

namcheong_armadatuah12.12Nam Cheong CEO Leong Seng Keat: "Having achieved record order wins in 2013, we expect the sales momentum to continue this year as we tap into a resurgent market.” File photo.Not as risky as it seems Management is cognisant of the higher risks associated with its build-to-stock business model that earns more lucrative gross margins of 15-20% than the ~10% for the build-to-order business. 

Thus, management has always been cautious and maintained a worst-case scenario operating philosophy. 

In this aspect, Nam Cheong focuses on shallow water production assets which will be more resilient than deepwater exploration assets, which are at the highest risk of capex cut. 

The group stays in a healthy financial position (1Q14 net gearing of 0.35x) to ensure that it is able to absorb its newbuilds, in the event of a severe downturn. Lastly, it operates an asset-light model by subcontracting 80% of its orders to Chinese yards. 

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