Yangzijiang Shipbuilding (YZJ): Macquarie Equities Research has initiated coverage of the shipbuilder with an Outperform rating and a $1.34 target price, or an upside of 52%.
It sees key catalysts from 1) entry into the Offshore & Marine (O&M) segment and 2) new order wins, especially for its flagship 10,000TEU SAVER designs.
"YZJ is the top pick in our Chinese shipbuilding coverage as we believe it should continue to deliver the highest ROE with its highly profitable yard operations and enhanced returns by investing its high cash balance," wrote Macquarie analysts Shuwei Quek and Janet Lewis, CFA.
"It also has the strongest financial position of the companies in our coverage to withstand the current slowdown in new orders."
Macquarie opined that YZJ’s strong balance sheet acts as a signal of strength to shipowners. "Orders are more likely to gravitate toward shipbuilders with sufficient working capital to complete orders despite the climate of increasingly tail-heavy final payments. Banks are also more likely to cooperate and finance foreign shipowners alongside financially strong yards such as YZJ."
YZJ could also tap its high cash balance of Rmb6.7bn and make inroads into the O&M segment.
Macquarie highlighted risks, including possible losses from held-to-maturity investments that YZJ has invested in.
As YZJ’s held-to-maturity assets provide financing to domestic corporates, sharp economic weaknesses could affect these corporates’ repayment ability.
YZJ mitigated against such risk by requiring all loans be collateral-backed and carry an overall weighted average coverage ratio of 2.0x (marked-to-market on quarterly basis) of the value of the loans.
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Cerebos: Its 'rock-solid' balance sheet and attractive dividend yields have been highlighted by CIMB head of research Kenneth Ng after a company visit.
Cerebos has net cash of S$89m (S$0.28/share) as at Sep 11 and its strong cash generation is attractive especially in an economic storm, said Kenneth.
Management has consistently paid out S$0.25/share, translating to yields of 5.4%. The company has minimal reinvestment needs and have kept 5-year Free Cash Flow margins at 8% with FCF yields that CIMB are expecting to come in at about 6.7% for FY11.
At the current stock price ($4.65), the market appears to be expecting a decline in ROEs to below 20% beyond FY13 vs. CIMB's expectations of ROE sustainable at above.
"We think Cerebos represents good value on a combination of consistently high ROEs, an earnings CAGR of 22% and 5.3% dividend yields," wrote Kenneth, who has a $6.65 target price for the stock.
OKP: OCBC Investment Research recently met up with OKP's management for an update of their outlook of 2012 and also "as a check of our contract win assumptions for the next two years."
OCBC analyst Benjamin Lim learnt that the group has been working on a number of tenders and noted its high tender success rate (c.94% in 2010).
The majority of OKP's projects are government-related and the Land Transport Authority is a major customer. The government has already shown commitment to several projects to expand the island's road network.
OKP's current order book of more than $400 m already offers revenue visibility till 2014.
"We also like OKP's above peers' margins and undemanding valuations. We re-iterate our BUY rating and maintain our fair value estimate at S$0.64, implying potential upside of c.22%."
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