Nam Cheong

DMG & Partners Research, Feb 19

WE expect Nam Cheong to report healthy earnings of RM190 million or S$72.6 million (+39 per cent y-o-y) when it releases its FY2013 results on Feb 26. However, what is more important will be the number of vessels in its FY2015 shipbuilding programme. We expect a higher-than-street figure and, consequently, upward revisions for FY2015 if this trigger number exceeds 30. The stock remains an oil-and-gas top pick.

Street forecasts for Nam Cheong's FY2013 earnings range from RM171 million to RM190 million and average at RM182 million, reflecting 33 per cent growth over FY2012 numbers. Our top-of-street estimate is largely premised on anticipation of higher gross margins.

We expect Nam Cheong to raise its dividend on the back of strong earnings growth and a lower net gearing. Its FY2011/12 dividends were at 0.2/0.5 cent while net gearing stood at 63/39 per cent. As of Q3 2013, its net gearing was only 12 per cent, which reinforces its position to raise dividends. Our forecast is 0.87 cent, at a 25 per cent payout ratio. A 30 per cent payout ratio (1.05 cents) is possible and would not tax its financial capability and capital needs.

Strong historical earnings are always positive, but investors should always look ahead. We draw attention to the most important number that will be disclosed next week - the number of vessels in the company's FY2015 build-to-stock programme. As we understand street forecasts are conservative; at 25 to 30 vessels - our estimate is 28 - any figure above this range will prompt upward revisions.

We believe the FY2015 tally could come in at around 35 to 40 vessels for a number of reasons: i) Nam Cheong entered FY2014 with 18 of 30 stock vessels already sold and would probably aim to avoid a repeat; ii) its strong rig orderbook presents clear end-demand; iii) the offshore supply vessel fleet replacement cycle is still going strong.

Maintain "buy", with a S$0.45 target price. Nam Cheong remains our top pick in the oil-and-gas sector for its high growth, undemanding valuations, high ROE, strong balance sheet and industry dominance, amid a positive industry backdrop. Our target price is pegged to 10 times FY2014 forecast PE.

BUY