Nam Cheong is a dominant offshore support vessel (OSV) builder in Malaysia with an estimated 75% of domestic market share. It has an OSV yard in Malaysia, but it typically outsources the construction for majority of its vessels to third-party yards in China. This helps it scale up its production capability quickly without having to incur additional capital expenditures. Also, Nam Cheong benefits from local cabotage laws and is able to issue “letters of authorization”, allowing vessel operators to bid for Petronas’ contracts before acquiring the necessary vessels, making it the choice OSV yard in Malaysia. We also believe the group will benefit from Petronas’ RM300b capex over FY11-15F and value its shares at 8x FY13F EPS. Initiate with BUY with fair value estimate of S$0.28.
Dominant market position in Malaysia
Nam Cheong has a very strong market position in Malaysia (estimated 75% domestic market share for OSV shipbuilding) due to its effective outsourcing strategy and home ground advantages. In addition, we feel that it could be a key beneficiary of Petronas’ RM300b capex plans for FY11-15F.
Effective outsourcing strategy
The group has an OSV yard in Sarawak, Malaysia, but it typically outsources the construction for the majority of its vessels to third-party yards in Fujian, China. This enables Nam Cheong to scale up its production capability quickly without having to incur additional capital expenditures. Also, it is able to take advantage of the lower labour costs in China.
Home ground advantages
Among other criteria, Malaysia’s cabotage laws require the vessels operating in local waters to be registered in Malaysia or carry the country’s flag. This represents a significant barrier of entry and reduces competition from foreign OSV yards. In addition, Nam Cheong is also able to issue “letters of authorization” that allows operators to bid for Petronas’ contracts before acquiring the necessary vessels, making it the choice OSV yard in Malaysia.
Key beneficiary of Petronas’ RM300b capex plans
In 2011, Petronas announced that it will invest RM300b in capital expenditure over the next five years to upgrade asset integrity, enhance yield of existing assets and drive its growth. We believe this would likely result in increased investments across the broad Malaysian oil & gas sector and Nam Cheong could benefit from rising OSV demand.
Initiate with BUY; FV: S$0.28
We compared Nam Cheong against a group of mid-cap offshore companies listed on SGX (see below) and value its shares at 8x FY13F EPS, roughly in-line with its peers. Initiate with BUY with a fair value estimate of S$0.28.
Nam Cheong has a very strong market position in Malaysia (estimated 75% domestic market share for OSV shipbuilding) due to its effective outsourcing strategy and home ground advantages. In addition, we feel that it could be a key beneficiary of Petronas’ RM300b capex plans for FY11-15F.
Effective outsourcing strategy
The group has an OSV yard in Sarawak, Malaysia, but it typically outsources the construction for the majority of its vessels to third-party yards in Fujian, China. This enables Nam Cheong to scale up its production capability quickly without having to incur additional capital expenditures. Also, it is able to take advantage of the lower labour costs in China.
Home ground advantages
Among other criteria, Malaysia’s cabotage laws require the vessels operating in local waters to be registered in Malaysia or carry the country’s flag. This represents a significant barrier of entry and reduces competition from foreign OSV yards. In addition, Nam Cheong is also able to issue “letters of authorization” that allows operators to bid for Petronas’ contracts before acquiring the necessary vessels, making it the choice OSV yard in Malaysia.
Key beneficiary of Petronas’ RM300b capex plans
In 2011, Petronas announced that it will invest RM300b in capital expenditure over the next five years to upgrade asset integrity, enhance yield of existing assets and drive its growth. We believe this would likely result in increased investments across the broad Malaysian oil & gas sector and Nam Cheong could benefit from rising OSV demand.
Initiate with BUY; FV: S$0.28
We compared Nam Cheong against a group of mid-cap offshore companies listed on SGX (see below) and value its shares at 8x FY13F EPS, roughly in-line with its peers. Initiate with BUY with a fair value estimate of S$0.28.
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