RM1.22 billion contract wins! News super-charges this stock 19% in 1 day

THE CONTEXT The Offshore Support Vessel market is on fire, as an industry report put it quite vividly. Charter rates are at multi-year highs because: • There’s little supply of new vessels on the horizon. Building them takes 2-3 years and financing is hard to get in the first place. Newbuilding is a long-term investment decision as the assets have a 20+ year lifespan, and now there are ESG considerations in play. • This tight supply is being made worse by underinvestment in newbuilds in past years after an oil crisis followed by the Covid pandemic. There are vessels cold-stacked during the pandemic which are yet to be reactivated for various reasons, including the high cost.  Meanwhile, the operating fleet out there has aged. In contrast, Nam Cheong Ltd, a Singapore-listco, has a fleet of around 30 vessels that is relatively young.

Given the backdrop, Nam Cheong and its peers (mostly those on Bursa Malaysia) have been reporting strong quarterly results this year.

Nam Cheong's gross margins are excellent at around 50%, an industry norm in many places. 

US-listed Tidewater, the biggest OSV operator in the world, has projected it would record a gross margin of approximately 51% for 2024.

That highlights the positive market dynamics, raising investor interest and Nam Cheong's stock price, which peaked at 48 cents in mid-Oct and then slipped all the way to 35 cents or so.

An announcement on Thursday night (28 Nov) lifted Nam Cheong stock the next day by 19%, from 36.5 cents to 43.5 cents.

Nam Cheong has not made such an announcement (on contract wins) in recent years, which made it all the more galvanising, as it has been largely going with spot charters.

The Contract Details:

• Vessel Count: Nam Cheong will charter out 12 vessels, including Anchor Handling Tug Supply vessels, Platform Supply Vessels, Safety Standby Vessel, and Landing Craft, to regional and international oil majors.
  
  

  "The contracts are a testament to Nam Cheong's capabilities and its strategic positioning in a region experiencing growth in the oil and gas sector." --Leong Seng Keat, CEO, Nam Cheong

  Nam Cheong said the contracts are worth up to RM1.22 billion, including options for extension. 
• Charter Period: The contracts will commence in 2025 for 3 years, with options for extension.
  
  

Questions, speculation:
While the announcement provides a broad overview of the contracts, several questions remain:

• Financial Impact: The exact financial impact on the Group's performance from 2025 was not quantified, though it is expected to be positive.
  
  One may speculate that Nam Cheong has given up some gross margin in exchange for the certainty of long-term contracts.
  
  The counter argument is, why would it do so when spot charter rates are expected to be strong, if not higher, in the years to come given the supply-demand dynamics?
  
  Next, let's put some context around the RM1.22 billion figure for 12 vessels on hire.
  
  It works out to an annual average over 3 years of RM407 million, a figure which is actually likely to be lower since the RM1.22 billion includes options for extension.
  
  For perspective, in 9M2024, Nam Cheong's total revenue for its entire fleet of about 30 vessels was RM514 million.  
  
• Details on Options: As the specifics of the options were not detailed, there's room for speculation on the potential length, pricing and conditions of these extensions.
  
  
  
  

See also: Demand is strong, supply is constrained. Things have not been this good for this company in a long while