OFFLOADING UNSOLD INVENTORY IS KEY
Stock looks fairly valued for now; wait for signs of recovery.
- Stock has hovered in a tight range which we believe reflects the still-challenging OSV environment and lack of vessel sales momentum.
- Upside to our target price is not significant.
Can Nam Cheong find buyers in this environment?
- Vessel sales have slowed in FY15 on the back of the oil price slump, with only two contract wins YTD.
- The company has yet to sell eight vessels from its 2015 built-to-stock programme and 18 from its 2016 programme. An added worry is that almost half of the unsold vessels are PSVs, which is probably the most oversupplied segment currently in the OSV space.
May not be as bad as FY09.
- In FY09, following the financial crisis, Nam Cheong sold only four units of OSVs.
- We believe the situation will be better this time around, as it is primarily an oil price crisis and not a credit crunch issue.
- If requirements are there, customers can still access the credit markets for vessel loans. Thus, there is hope for order flows to pick up by 2H15.
Valuation:
- Given the lack of earnings momentum as well as muted vessel sales, we retain our HOLD call on Nam Cheong with an adjusted target price of S$0.33 per share, pegged to 1.4x P/BV.
- This is in line with 14-15% ROE expectations for FY15/16. Dividend yield of about 3% limits downside risks to an extent.
Key Risks to Our View:
- Slower recovery in orders, competition from China and currency fluctuations are key worries.
- The key risk to our view is that order wins rebound more slowly than predicted, leaving the company with excess vessel inventory on its balance sheet.
- While its balance sheet is reasonably strong at this point, working capital needs to be managed well to avoid stress.
- Increasing competition from the Chinese yards, which have been moving up the value chain into more sophisticated OSVs, can also cause downside in the form of pricing woes and margin pressures.
Source: DBS Group Research
