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Friday, 15 May 2015

SELL (Maintained)

COMPANY RESULTS

Nam Cheong (NCL SP) 1Q15: Net Profit Falls 45% yoy; A Smaller 2016 Shipbuilding Programme 1Q15 net profit fell 45% yoy to RM39.3m, in line with our expectations. Gross margin was maintained at 21% but management continues to guide for a lower end of 15-20% for 2015. About 70% of RM1.2b orderbook is to be recognised in 2015. It unveils its 2016 shipbuilding programme of 30 vessels, comprising 11 reshuffled from 2015’s shipbuilding programme. Maintain SELL. Our earnings forecasts and target price of S$0.28 are under review.

Share Price Target Price (under review) Upside

S$0.315 S$0.28 -11.6%

COMPANY DESCRIPTION Nam Cheong is a dominant Malaysian offshore marine group specialising in the building of offshore support vessels.

1Q15 RESULTS 1Q14

STOCK DATA

326.3 68.3 39.3

407.3 86.3 71.6

yoy % chg -20 -21 -45

Net Profit Gross Margin (%)

39.3 20.9

71.1 21.2

-45 (0.2ppt)

See segment gross margin comments

310.7 15.6

383.2 24.1

-19 -35

Fewer vessel deliveries Lower utilisation

Segmental Turnover Shipbuilding Vessel Chartering Gross Margin (%) Shipbuilding Vessel Chartering

1Q15

Remarks

Year to 31 Dec (RMm) Turnover Gross Profit Pre-tax Profit

See segment turnover comments Due to higher finance costs, forex loss and net fair value loss on derivatives

GICS sector Bloomberg ticker: Shares issued (m): Market cap (S$m): Market cap (US$m): 3-mth avg daily t'over (US$m): Price Performance (%) 52-week high/low

1mth 20.0 39.6

20.1 37.7

(0.1ppt) 1.8ppt

Industrials NCL SP 2,096.3 660.3 500.5 0.8

Recognition of vessels contracted at higher margins Maintained within 38-40% band

Source: Nam Cheong, UOB Kay Hian

RESULTS  Net profit declined 45% yoy, in line with our expectations. 1Q15 net profit was RM39.3m, a 45% decline yoy from RM71.3m in 1Q14. The decline was attributable to lower revenue from fewer vessels delivered (1Q15: 6 units, 1Q14: 7 units), higher finance costs from its MTN issuance, a forex loss of RM2.5m and net fair value loss of RM3.8m on derivatives. Adjusted for one-off items, net profit was RM45.6m, slightly higher than our 1Q15 estimate of RM40m-44m. 1Q15 net profit represented 17% of our full-year target of RM223m.

(3.1)

S$0.495/S$0.295

3mth

6mth

1yr

(1.6)

(22.2)

(13.7)

YTD 0.0

Major Shareholders

%

Datuk Tiong Su Kouk

50.3

FY15 NAV/Share (RM)

0.64

FY15 Net Debt/Share (RM)

0.24

PRICE CHART (lcy)

NAM CHEONG LIMITED

NAM CHEONG LIMITED/FSSTI INDEX

(%)

0.55

140

0.50

130 120

0.45

110 0.40 100 0.35

KEY FINANCIALS Year to 31 Dec (RMm)

2013

2014

2015F

2016F

2017F

Net turnover EBITDA Operating profit Net profit (rep./act.) Net profit (adj.) EPS (sen) PE (x) P/B (x) EV/EBITDA (x) Dividend yield (%) Net margin (%) Net debt/(cash) to equity (%) Interest cover (x) ROE (%) Consensus net profit UOBKH/Consensus (x)

1,257 215 199 206 206 9.8 8.7 1.9 10.7 3.2 16.4 56.4 19.2 26.9 -

1,929 307 289 302 302 14.4 5.9 1.5 7.5 4.7 15.6 42.8 19.2 28.0 -

2,057 264 249 223 223 10.6 8.1 1.3 8.7 3.1 10.8 36.7 6.9 17.3 283 0.79

2,197 298 281 265 265 12.6 6.8 1.1 7.7 3.7 12.1 26.7 10.9 18.2 293 0.91

2,382 324 305 292 292 13.9 6.2 1.0 7.1 4.1 12.3 19.6 13.1 17.4 256 1.14

90

0.30

80

0.25

70

60 40

Volume (m)

20 0

May 14

Jul 14

Sep 14

Nov 14

Jan 15

Mar 15

May 15

Source: Bloomberg

ANALYSTS Foo Zhiwei +65 6590 6626 [email protected] Nancy Wei +65 6590 6628 [email protected]

Source: Nam Cheong, Bloomberg, UOB Kay Hian

Refer to last page for important disclosures.

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 Gross margin healthy at 21%. Overall gross margin was 20.9%, a 0.2ppt decline from 21.2% in 1Q14. Shipbuilding gross margin was flat yoy at 20.0% (1Q14: 20.1%) but higher than the 14.7% in 4Q14, attributed to the recognition of higher-margin vessels previously sold. Chartering gross margin increased 1.8ppt yoy from 37.7% in 1Q14 to 39.6% in 1Q15. Management guidance for gross margin at the low end of 1520% for 2015 remains unchanged.  Finance costs up 94% yoy on MTN issuance. Finance costs rose 94% yoy from RM3.6m in 1Q14 to RM7.0m in 1Q15. This was attributable to the higher interest expense from the issuance of MTN notes, which yield 5-6%. Nam Cheong currently has an outstanding S$400m MTN notes, with S$110m due in Nov 15.  Jointly controlled entities/associates reported a RM0.2m loss. 1Q15 share of profit in jointly controlled entities recorded a gain of RM2.6m but was offset by share or loss in associate of RM2.7m due to lower utilisation. Contributions from these segments are expected to stay low going forward.

Friday, 15 May 2015

SHIPBUILDING PROGRAMME – 2015 12 10

3 1

1 2 1

AHTS/ERRV

PSV

AWB/WB

0

Delivered

Sold and in progress

Unsold

Source: Nam Cheong

SHIPBUILDING PROGRAMME – 2016

15

 2016 programme unveiled, 2015 programme reshuffled. Nam Cheong has revised its 2015 programme downwards from 35 to 24 vessels, reshuffling 11 vessels into the 2016 programme of 30 vessels. This means that the 2016 programme has 19 new vessels. Deliveries for 2015 have been deferred to 2016 to address the low demand for OSV vessels in the current environment.

5

VALUATION/RECOMMENDATION

4

2

 Orderbook at RM1.6b. Nam Cheong’s orderbook was RM1.6b as of 31 Mar 15, with RM1.2b unrecognised. About 70% of this amount will be recognised in 2015, with the remainder in 2016.

 2015-16 earnings forecasts under review. We put our earnings forecasts for 2015 and 2016 under review as we await further details of the 2016 shipbuilding plan. Given the downward revision of the 2015 programme from 35 to 24 vessels, earnings are expected to drop sharply in 2015.

5

4

20

EARNINGS REVISION/RISK

5

6

STOCK IMPACT

 Business outlook remains weak. Despite the poor business environment, Nam Cheong continues to receive strong enquiries for its vessels although transactions remain elusive. Our conversations with shipbrokers indicate a glut of vessels sitting in Chinese yards awaiting buyers, especially in the PSV segment. Despite Brent at US$68/bbl, tendering activity for 2015 remains weak and is expected to return in 2016 at the earliest. The low activity will give pause to vessel owners seeking newbuilds, making Nam Cheong’s BTS model particularly challenging.

2

8

8

10

7 7

4

0 AHTS/ERRV

PSV

Sold and in progress

3 1 AWB/WB Unsold

Source: Nam Cheong

ORDERBOOK DELIVERY Vessels

Delivery Year 2015

2016

5150bhp AHTS

1

-

6000bhp AHTS

2

2

12000bhp AHTS

-

1

3000dwt PSV

-

2

4500dwt PSV

2

2

5000dwt PSV

1

-

AWB

1

1

Workboat

1

-

ERRV

2

4

10

12

Total Source: Nam Cheong

 Maintain SELL and our target price of S$0.28 is under review. Our target price is based on 1.01x 2016F P/B. We switch valuation to be based on P/B as earnings become volatile in the current environment. SHARE PRICE CATALYST  Contract wins.  Higher oil prices coupled with higher vessel activity.

Refer to last page for important disclosures.

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PROFIT & LOSS Year to 31 Dec (RMm) Net turnover EBITDA Deprec. & amort. EBIT

BALANCE SHEET 2014

2015F

2016F

2017F

1,928.6

2,057.5

2,197.1

2,381.8

Year to 31 Dec (RMm)

2014

2015F

2016F

2017F

Fixed assets

290.1

317.0

345.1

307.1

264.4

298.1

323.8

375.1

Other LT assets

313.2

322.2

333.6

18.1

15.3

16.9

345.6

18.7

Cash/ST investment

787.8

372.4

439.4

289.0

249.1

281.1

254.6

305.1

Other current assets

1,861.3

1,900.4

2,026.5

2,195.4

Total assets

3,170.7

Total other non-operating income

20.0

5.0

5.0

5.0

Associate contributions

10.3

11.9

12.5

13.1

Net interest income/(expense)

(16.0)

(38.2)

(27.4)

Pre-tax profit

303.3

227.7

(1.1)

(4.6)

Tax

3,252.4

2,912.1

3,144.6

ST debt

556.2

12.7

253.0

10.3

(24.8)

Other current liabilities

719.6

680.0

715.2

768.2

271.2

298.3

LT debt

753.1

858.1

605.1

594.8

(5.4)

(6.0)

Other LT liabilities

4.1

4.1

4.1

4.1

Shareholders' equity

1,218.8

1,356.3

1,565.9

1,791.4

0.6

1.0

1.4

1.9

3,252.4

2,912.1

3,144.6

3,170.7

2014

2015F

2016F

2017F

Minorities

(0.4)

(0.4)

(0.5)

(0.5)

Net profit

301.8

222.8

265.3

291.9

Minority interest

Net profit (adj.)

301.8

222.8

265.3

291.9

Total liabilities & equity

Year to 31 Dec (RMm)

2014

2015F

2016F

2017F

Year to 31 Dec (%)

Operating

60.9

119.1

163.2

164.0

Profitability

CASH FLOW

Pre-tax profit

Friday, 15 May 2015

KEY METRICS

303.3

227.7

271.2

298.3

EBITDA margin

15.9

12.9

13.6

13.6

Tax

(4.3)

(4.6)

(5.4)

(6.0)

Pre-tax margin

15.7

11.1

12.3

12.5

Deprec. & amort.

18.1

15.3

16.9

18.7

Net margin

15.6

10.8

12.1

12.3

(232.5)

(78.9)

(90.9)

(115.8)

ROA

11.1

7.2

8.8

9.2

29.8

26.4

14.9

11.7

ROE

28.0

17.3

18.2

17.4

Other operating cashflows

(53.5)

(66.9)

(43.6)

(43.0)

Investing

(82.8)

(12.5)

(27.8)

(29.5)

Growth

(6.1)

(41.1)

(43.9)

(47.6)

Turnover

53.4

6.7

6.8

8.4

0.0

0.0

0.0

0.0

EBITDA

43.0

(13.9)

12.7

8.6

148.3

0.0

0.0

0.0

Pre-tax profit

52.2

(24.9)

19.1

10.0

Net profit

46.7

(26.2)

19.1

10.0

Net profit (adj.)

46.7

(26.2)

19.1

10.0

EPS

46.0

(26.2)

19.1

10.0

Working capital changes Non-cash items

Capex (growth) Investments Proceeds from sale of assets Others

(225.0)

28.6

16.2

18.2

Financing

475.1

(522.0)

(68.5)

(319.4)

Dividend payments

(54.7)

(85.3)

(55.7)

(66.4)

0.0

0.0

0.0

0.0

Issue of shares Proceeds from borrowings

0.0

(436.8)

(12.7)

(253.0)

(191.8)

0.0

0.0

0.0

Debt to total capital

Others/interest paid

721.6

0.0

0.0

0.0

Debt to equity

Net cash inflow (outflow)

453.2

(415.4)

66.9

(184.8)

Beginning cash & cash equivalent

321.9

787.8

372.4

439.4

Loan repayment

Changes due to forex impact Ending cash & cash equivalent

12.8

0.0

0.0

0.0

787.8

372.4

439.4

254.6

Refer to last page for important disclosures.

Leverage 51.8

39.1

35.4

25.2

107.4

64.2

54.8

33.8

Net debt/(cash) to equity

42.8

36.7

26.7

19.6

Interest cover (x)

19.2

6.9

10.9

13.1

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UOBKH is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution by UOBKH (whether directly or through its US registered broker dealer affiliate named below) to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). All US persons that

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