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Monday, December 8, 2014

NAM CHEONG: Little Impact From Petronas’ Capex Cut

Only five of 25 vessels sold this year to Malaysian customers. Nam Cheong has been successful in diversifying its customer base. Of the c.110 vessels it has delivered since 2007, about 48 went to Malaysian customers, or c.44% in the last seven years.

YTD, it has sold 25 vessels but only five (accounting for 30% of YTD sales in dollar-value terms) were sold to local customers, ie the split is now c.20-30% Malaysian customers and 70-80% to the rest of the world.

As such, Nam Cheong is no longer as exposed to Petronas’ capex changes and the share price reaction yesterday looks extreme.

Petronas reiterates need to increase oil reserves. Petronas’ CEO Tan Sri Dato' Shamsul Azhar Abbas said that it needs to invest in overseas projects and increase its oil reserves in order to maintain its growth, considering that current production declines by c.10% a year naturally. Petronas has an internal production growth target of 3-3.5% a year, according to our Malaysian oil and gas (O&G) analyst Kong Ho Meng.

Our read-through is that upstream exploration and production activity will have to continue, indicating that low-cost sources such as conventional shallow-water fields will continue to generate order flow.

Little risk of cancellations. In this environment, a key concern is order cancellations – >80% of Nam Cheong’s vessel sales are to customers with firm contract backing. Ironically, we see the risk of cancellations being higher for build-to-order players today, where customers would rather walk away from a 20% downpayment than take delivery of a vessel which may not see employment.

A steal at 4-6x P/E. Nam Cheong is now trading at 6x/5x/4x FY14-16F P/Es, undervaluing its 16-60% earnings growth and 30% ROEs. Its industry position has been strengthening as it increases its global shallow-water market share, now c.15% of FY15F global deliveries.


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