Nam Cheong

UOBKayhian on 13 Feb 2015

FY15F PE (x): 6.8
 FY16F PE (x): 6.0

Results within expectations. Net profits of RM42.2m for 4Q14 and RM302.2m for 2014 were within expectations. Higher revenue from its shipbuilding segment, larger-thanexpected gains in other income and JV contributions helped make up for the lower gross margin of 14.6% for 4Q14, which dragged 2044 gross margin to 19.6%. The higher other income was attributed to net foreign exchange gains. Lower gross margin a bigger impact than failure to sell. The weak offshore market outlook has softened demand for OSV vessels, putting Nam Ccheong’s BTS model at risk of being unable to sell all their vessels within the programme year. Additionally, gross margin will face downward pressure. Based on a sensitivity analysis (which ignores delivery schedule), a change in gross margin impacts EPS much more. Our base case assumes the sale of 33 out of 35 vessels in the 2015 programme. While failing to sell a vessel impacts EPS by only 1.1%, a 1ppt change in gross margin impact EPS by 7.4%. As such, the 4Q14 weakness in shipbuilding margin is of concern. Maintain HOLD with a lower target price of S$0.33. Our target price remains pegged at 7x (long-term sector mean) 2015F PE (8x previously). The oil price collapse has resulted in oil majors cutting capex, which will impact Nam Cheong's BTS business model. However, this will be cushioned by its solid execution ability and a growing client base. Entry price is S$0.27