Excerpts from DBS report
Analyst: Pei Hwa HO
|Overhang removed, value emerging|
• Underperformance of 5-39% due to MSCI deletion at end-November set to reverse
• Order momentum to accelerate with shipping recovery
• Conviction BUY; stock also offers 4.4% dividend yield
Recent underperformance due to MSCI rebalancing offers a golden opportunity - trading at below cash of S$1.15/share and unjustifiably low 0.5x price/book value (P/BV) (2SD [standard deviation] below mean) despite superior financials of 8% return on equity (ROE) and sustainable dividend per share (DPS) of >4Scts (~4.4% dividend yield).
Distinctive economic moat as the largest and most cost-efficient private shipbuilder in China; well-positioned to ride on shipping recovery.
Yangzijiang Shipbuilding (Yangzijiang) has demonstrated earnings resilience during downturns, bolstered by a strong balance sheet with steady investment income.
Key catalysts include sizeable contract flows and progress in the liquefied natural gas (LNG) carrier market.
Our target price (TP) of S$1.40 is based on sum-of-parts (SOP), pegged to 8x FY20F price-to-earnings (PE) on shipbuilding earnings, and 0.7x P/BV for both investments and bulk carrier/tanker fleet.
This translates into 0.8x P/BV (0.5 SD below its 5-year mean of 0.9x).
Where we differ:
Market has over-penalised Yangzijiang for its debt investments, not realising that most investments are backed by collateral of 1.5-2.5x.
Key Risks to Our View:
Revenue is denominated mainly in US Dollar (USD). If the net exposure at ~50% is unhedged, every 1% USD depreciation could lead to a 1.5% decline in earnings.
Every 1% rise in steel cost, which accounts for about 20% of cost of goods sold (COGS) could result in a 0.8% drop in earnings.
Full report here.