Tuesday 19 May 2015

Nam Cheong

OCBC on 14 May 2015

Nam Cheong reported a 20% YoY fall in revenue to RM326.3m and a 45% drop in net profit to RM39.3m in 1Q15, such that the latter accounted for 14% of ours and the street’s full year estimates, below expectations. Though shipbuilding gross margin remained healthy at 20%, management has guided for lower levels for the rest of this year. New vessel sales are likely to be substantially lower given the changes in its shipbuilding programme. We like Nam Cheong for its asset-light business model and its operational flexibility as seen from the changes to its shipbuilding programme (no compensation to yards). But as we lower our earnings estimates given the tough environment, we downgrade our rating to SELL based on our lower fair value estimate of S$0.27 (7x FY15/16 earnings) on valuation grounds.

1Q15 results below
Nam Cheong reported a 20% YoY fall in revenue to RM326.3m and a 45% drop in net profit to RM39.3m in 1Q15, such that the latter accounted for 14% of ours and the street’s full year estimates, below expectations. Gross profit margin for the shipbuilding segment was, however, consistent with 1Q14 at 20%, and overall gross profit margin was maintained at 21%. 

Changes to shipbuilding programme
To date, the group has announced only two vessel sales worth about RM212m. In comparison, the group sold 27 vessels last year worth RM1.8b. Given the slow new sales momentum, it is not surprising that the group has rescheduled its shipbuilding programme. Instead of having 35 vessels to be delivered this year (20 sold, 15 unsold), there will now be 24 vessels slated to be delivered this year (15 sold, 8 unsold), with 11 moving into FY16 delivery. This relieves the pressure on the group, as the Chinese yards have agreed to defer deliveries of the vessels. 

Room for lower margins
Looking ahead, management mentioned that shipbuilding margins may be at the lower range of 15-20% for the rest of the year, due the delivery of more build-to-order vessels that have lower margins. Margins for vessel sales this year are also likely to be lower given the challenging environment. 

Downgrade to SELL
As at 31 Mar 2015, the group had an order book of about RM1.6b, of which RM1.2b remains unrecognised (~75% to be booked this year). Meanwhile, net gearing remained healthy at 0.45x in 1Q15. We like Nam Cheong for its asset-light business model and its operational flexibility as seen from the changes to its shipbuilding programme (no compensation to yards). But as we lower our earnings estimates given the tough environment, we downgrade our rating to SELL based on our lower fair value estimate of S$0.27 (7x FY15/16 earnings) on valuation grounds (prev. S$0.30).

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