Excerpts from analysts' report

150_1Lee-YuejerOSK-DMG analysts:
 Lee Yue Jer, CFA (left)  & Jesalyn Wong

Nam Cheong sold two vessels for c.USD45m and we note that its shallow water vessel price tag remain unchanged despite collapsing oil prices.

Maintain BUY, with TP adjusted to SGD0.58 (from SGD0.61, 87.1% upside) as we lower our P/E multiple to 8x (from 9x). We note that these prices point to the segment’s resilience and its business model. Valuations are compelling at 5.6x/4.3x FY14/15F P/Es after pricing in a bear case scenario. 

Sale of vessels worth USD45m in a low oil price environment. Nam Cheong secured sales contracts for a 6,000 brake horsepower (bhp) anchor handling towing supply (AHTS) vessel and a 5,000 deadweight tonnage (dwt) platform supply vessel (PSV) from repeat customers Vroon BV and EA Temile Development Co of Nigeria respectively. With these contracts, its orderbook stands at c.MYR1.7bn, comprising 26 vessels. 

namcheong_build9.14Nam Cheong builds offshore support vessels (OSVs) for use in the offshore oil and gas industry. Photo: CompanyShallow water segment remains resilient to oil price volatility. Nam Cheong’s ability to secure these two contracts indicates that the shallow water segment remains resilient against the drop in oil prices.

We see heavier cuts in deepwater where costs are c.USD40-80/barrel (bbl) vs shallow water expenditure where costs are USD25-50/bbl.

Furthermore, its build-to-stock model should benefit in the current climate where customers prefer to secure contracts ahead of ordering vessels.

Bear case scenario priced in. In a bear case scenario, Nam Cheong’s shipbuilding margin falls to 10% from 24% in 3Q14 and our current 19.5% (FY15F) and 19% (FY16F) estimates with FY15F/FY16F profits falling to MYR169m/MYR199m respectively. The current SGD0.31/share price implies 9x bear case earnings.

Compelling (re-) entry valuations. Valuations are compelling at 5.6x/4.3x FY14/15F P/Es with 58/31% earnings growth in those years respectively. Our TP is adjusted to SGD0.58 (from SGD0.61) as we lower our P/E multiple to 8x (from 9x), rolling over to FY15F earnings to reflect the weaker market sentiment.

Lower oil prices will force high-cost marginal players (heavy oil and some shale oil producers) to cut capex. This should lead to lower supply in 2H15 from these sources and move the oil market towards equilibrium. One near-term catalyst will be the launch of Nam Cheong’s first diesel-electric PSV in FY15. 

Recent story:
NAM CHEONG: Little Impact From Petronas’ Capex Cut

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