Nam Cheong

Maybank Kim Eng, Oct 23

WE initiate coverage on Nam Cheong with a "buy" rating and TP of S$0.37, pegged to 9 times PE on average FY13-15F EPS.

We see Nam Cheong benefiting from (1) a recovering Offshore Support Vessel (OSV) market, (2) OSV replacement cycle, (3) Petronas's Oil & Gas capex and (4) its foresight in reading the supply-demand dynamics of the sector.

We expect the company to deliver 16 per cent EPS CAGR over FY13-15F as vessels in its ramped-up newbuild programmes are readily absorbed by the market.

We expect the OSV ordering cycle to turn positive and, in our view, Nam Cheong possesses the right model to capitalise on this cyclical upswing.

By building vessels on a speculative basis, Nam Cheong will have available vessels ahead of shipyards which build only upon receiving orders. This model has also allowed Nam Cheong to charge premium prices and deliver higher-than-peer margins.

As the largest domestic OSV builder in Malaysia, Nam Cheong has established close ties with the country's leading OSV owners, which include Bumi Armada, Perdana Petroleum and Icon Offshore, who are Petronas-licensed operators.

Consequently, Nam Cheong stands to benefit indirectly from Petronas's RM300 billion (S$117.4 billion) capex spending plan over 2011-2015.

Nam Cheong has demonstrated a strong ability to read market demand with a track record of selling all pre-built vessels before delivery.

The 28 vessels to be built for 2014 is a big ramp-up over the 19 vessels for 2013 and it has already sold 57 per cent of the 2014 vessels.

Outstanding orderbook stands at RM1.7 billion. We forecast 2015 programme to be on a similar scale as 2014.

If it can maintain its track record of selling all vessels before they are delivered, we forecast record sales close to RM2.0 billion in FY14F.

At current share price, stock is trading at only 6.1x/6.6 times FY14F/15F PEs, inexpensive considering the robust growth prospects. We also see possibility of higher dividend payout in FY14F translating into a yield of about 5 per cent.

BUY