It is common knowledge that Malaysia’s Petronas has sharply increased its 2012-2017 capex by approximately 70% to MYR300b over the previous five years. A likely beneficiary to this industry development is Nam Cheong Limited (“Nam Cheong”).
Description
According to an independent market research report by Pareto Securities Asia Pte Ltd., Nam Cheong is the largest shipbuilder of offshore support vessels (“OSVs”) in Malaysia and the 2nd largest player east of the Suez Canal. It has about 50-75% of the market share in Malaysia and 7% of the regional market share. It started ship building in 1968 and has more than two decades of track record in building OSVs. Since 2007, it has delivered more than 80 vessels. Examples of OSVs built are accommodation work barges, accommodation workboats, anchor handing tug supply (“AHTS”) vessels, Platform supply vessels (“PSVs”) and safety standby vessels (“SSVs”) etc.
Nam Cheong’s shipbuilding arm comprises more than 90% of its overall group revenue for the past three years. Its shipbuilding can be segregated into build to stock (builds ahead of firm orders) and build to order model (builds vessels with contracts secured).
Besides shipbuilding, it also has a ship chartering arm with a fleet of 13 vessels, namely two AHTS vessels, two landing crafts and nine SSVs.
Its headquarters is situated in Kuala Lumpur. Readers can read more about Nam Cheong on its company website: http://www.namcheong.com.my/our-business/shipbuilding.cfm
Investment merits
Bright industry outlook
According to various market research, notwithstanding the weak shipbuilding cycle, the OSV sector is a buoyant sector to be in, especially in Malaysia. It is common knowledge that Malaysia’s Petronas has sharply increased its 2012-2017 capex by approximately 70% to MYR300b over the previous five years. (See Figure 1) This would fuel developments in marginal and deepwater field developments and increased exploratory activities. Such activities should bode well for Malaysia OSV operators such as (Bumi Armada, Perdana Petroleum) and consequently to OSV builders such as Nam Cheong.
Figure 1: Petronas’ capex
Source: CIMB, Petronas
Secondly, according to Figure 2, there seems to be replacement demand for AHTS and PSVs. About 37% of the world’s AHTS is older than the usual lifespan of 25 years.
It is noteworthy that the majority of vessels built in the early days (1980s) were arguably small-to-medium sized vessels due to low technical capability, requirements and they are likely to be less fuel efficient. Vessel owners are showing increasing preference for younger and more fuel efficient vessels. Consequently, this fuels replacement demand for AHTS and PSVs.
Figure 2: Age profile of AHTS and PSV
Source: CIMB, Clarksons
Build to stock business model à higher margins
Part of Nam Cheong’s shipbuilding business model is its build to stock model. This essentially builds vessels in anticipation of orders, and sells the vessels at a premium due to the short time to delivery. This is the main reason why Nam Cheong can command enviable shipbuilding margins of 19-20% over the past three years as compared to high single digit margins for its peers which do not have a build to stock model.
Strong earnings visibility
Nam Cheong’s net shipbuilding order book amounted to MYR1.3b (FY12 group revenue was MYR877m), thus this lends some visibility to its FY13F and FY14F results. In addition, Nam Cheong’s sales momentum remains strong. It has sold 13 vessels year to date as compared to the record 21 vessels in FY2012. (FY2011: 13 vessels) Typically, according to CIMB research, revenues tend to lag vessel sales by 1-2 years.
Risks
Inherent risks in their build to stock model
As Nam Cheong builds its vessels ahead of firm orders for its build to stock model, there is a possibility that it may end up with unsold inventory. Being in the business for decades, it is cognizant of this risk and it builds vessels catering to the small medium OSV segment which is the largest market among OSVs. This should mitigate risk to a certain extent.
Lumpy revenue / net profits
For its build to stock model, all the work to date is recognised immediately in revenue and profits upon the signing of firm sale orders. Future progress on build to stock shipbuilding program is recognized on a percentage-of-completion method. Thus, it is apparent that quarterly results can swing depending on the timing of vessel sales.
Ave analyst TP: $0.350
According to Bloomberg, Nam Cheong trades at 8.6x FY13F PE vis-à-vis 7.8x FY13F PE for Vard Holdings. However, most analysts believe that Nam Cheong’s results are likely to be stronger in FY13F and FY14F as opposed to weak results from Vard Holdings.
To be balanced, I have also put in the various analyst target prices from Bloomberg. (See Figure 3). Ave
analyst target price is around $0.350.
analyst target price is around $0.350.
Figure 3: Ave analyst target price $0.350
Source: Bloomberg as on 18 Jul 13
Chart analysis
With reference to Chart 1, Nam Cheong has traded in a seven month range from $0.240 to 0.290 since 14 Dec 2012. It closed at $0.280 on last Friday. Day high and low were $0.280 and $0.270 respectively. Near term support and resistance are at $0.265-0.270 and $0.280 respectively. It is noteworthy that it has been testing $0.280 recently and it is likely that the more times it tests $0.280, the more likely it can breach past $0.280. The next resistance is seen at $0.290.
Having said the above, for stocks which trade within a range, it typically takes some good news (perhaps in the form of contract wins; good results etc) to propel them higher. If it breaches 0.290 with volume expansion, an eventual technical measured target price is around $0.340. Notwithstanding this, it is noteworthy that chart reading is subjective and may have different interpretations for different people.
Chart 1: Trading in a 7 month range 0.240-0.290
Source: CIMB itrade complimentary chart (19 Jul 13)
Conclusion
This is just an introduction to Nam Cheong. Readers who are keen to know more about Nam Cheong should visit the company website, read the company annual reports, latest financial results and announcements etc. There are also informative analyst reports which they can read to have a better idea on Nam Cheong. Readers can email me at crclk@yahoo.com.sg for the latest analyst reports and my writeup above complete with Figures 1 & 2 which i am unable to attach here.
P.S: I have mentioned this company informally to my clients in Sep 2012 (trading at $0.200); Dec 2012 ($0.240); Apr 2013 ($0.245) and recently Jul 2013 ($0.265). Finally, I have the time to sit down and do a writeup on this company on my blog.
Disclaimer
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Thanks for the blog post.Thanks Again.