Shipyard in insurer’s clothing

Using Chinese yards to support its build-to-stock business model, Nam Cheong is like an insurer, underwriting customers’ construction and market risks. For the risks it takes on, Nam Cheong enjoys high vessel sales as well as superior profitability and returns vs. Singapore peers.

Given Malaysian E& P spend and a raising OSV market, we project a 3-year EPS CAGR of 15%. The group has bolstered its balance sheet and its newbuild programme is backed by long-term debt. Hence, liquidity risks are mitigated if the OSV market plunges. We initiate Nam Cheong with an Outperform and target P/E of 8x CY14 (15% premium to peers’ average). Potential catalysts are stronger-than-expected vessel sales and earnings beat.

Malaysia’s largest OSV builder

By turnover, Nam Cheong is Malaysia’s largest offshore support vessel (OSV) builder. The group has over 20 years of track record in building OSVs and has delivered over 80 vessels since 2007. Using Chinese yards to support its build-to-stock business model, Nam Cheong has achieved a 3-year average gross margin of 19% vs. Singapore peers’ 9%. In terms of ROE, it achieved a 3-year average of 30% vs. Singapore peers’ 7%. Although build-to-stock is not unique to Nam Cheong in Malaysia, the company stands out with its close relationships with Malaysian OSV owners.

Rosy outlook

Malaysia’s Petronas has budgeted RM300bn (US$100bn) in E& P spend over 2012-17, up 70% from the previous five years, to arrest a production decline and boost reserves. Initiatives such as marginal and deepwater field developments as well as enhanced oil recovery mean more work for the Malaysian OSV sector. Given the improving OSV market, Nam Cheong has launched its most ambitious newbuild programme to date, which should propel earnings growth.

Still cheap vs. peers

Although its share price surged 96% in 2012, Nam Cheong trades at 6x CY14 P/E on a 3-year EPS CAGR of 15%. Singapore OSV builders are trading at 7x on flat earnings. Also, our cross-sectional P/BV to ROE regression analysis shows that the stock is relatively undervalued.

Stock Picks – Small /Mid Cap

Rec’n Price ($)

14 Jun

Target Price

($)

Nam Cheong Buy 0.275 0.36