Nam Cheong

DMG & Partners Research on 27 Aug 2012

WE initiate coverage with a "buy" rating and TP of S$0.290.

Nam Cheong is the dominant Offshore Support Vessel (OSV) builder in Malaysia with a market share of 75 per cent last year. It is bouncing off its FY2011 earnings trough, with EPS jumping 58 per cent this year and 24 per cent in FY2013 on the back of strong vessel sales amid a booming oil industry backdrop. At 5.4x FY2012F-2013F blended EPS, this is a steal. We see Nam Cheong being a strong candidate to double in 2-3 years.

We see Nam Cheong's net profit doubling over the next two years on the back of strong vessel sales since the bottom in 2009.

The growth will be driven by increasing vessel deliveries from 13 to 19 per year as well as building higher-value vessels.

"Letter of Authorisation" system for Malaysian builders allows Nam Cheong's customers to bid for contracts using its unsold vessels, and upon contract award to immediately purchase the vessel.

With a short time to delivery because of its build-to-stock model, Nam Cheong is a preferred OSV builder even among competing charterers.

An 80 per cent increase in Petronas capex forms a solid industry backdrop. Petronas has budgeted RM300 billion (S$120.7 billion) for capital expenditure over the next five years, a full 80 per cent increase over the previous five, in response to its falling oil production.

This provides a massive stimulus package to the entire Malaysian oil & gas industry.

Our target price of 29 cents is based on a P/E of 8.5x on blended FY2012F/2013F EPS, which is an undemanding multiple for the industry leader in Malaysia.

On the current growth profile, the same multiple on FY2014F EPS of 4.2 Singapore cents will result in the share price doubling to $0.360.

Key risks include a higher risk business model as well as lumpy results between quarters based on vessel sale dates.

BUY