Company Update, 23 June 2014

Nam Cheong (NCL SP)

Buy (Maintained)

Energy & Petrochemicals - Oil & Gas Services Market Cap: USD646m

Target Price: Price:

SGD0.53 SGD0.39 Macro Risks

USD84m Win To Finish 2Q14

Growth Value

Nam Cheong (NCL SP) Price Close

Relative to Straits Times Index (RHS)

0.40

149

0.38

143

0.36

137

0.34

131

0.32

125

0.30

119

0.28

113

0.26

107

0.24

101

0.22

95

0.20 70

89

60





40

 Apr-14

Feb-14

Dec-13

Oct-13

Aug-13

Jun-13

Vol m

30 10

Source: Bloomberg

Avg Turnover (SGD/USD) Cons. Upside (%) Upside (%) 52-wk Price low/high (SGD) Free float (%) Share outstanding (m) Shareholders (%)

1.93m/1.54m -2.6 35.1 0.26 - 0.39 42 2,098

SK Tiong Enterprise SB Hung Yung Enterprise SB Su Kouk Tiong

27.3 15.2 7.8

Share Performance (%)



Moving up the value chain. The two units sold today are 500-man AWBs, which are much larger than the typical 300-man units Nam Cheong builds to stock. The sale value/unit is USD42m, compared to c.USD30m for the 300-man units. The two options expire within six months and, if exercised, could double this order to USD168m. The two units are scheduled for delivery in 1Q/2Q16. Orderbook now stands at MYR1.5bn. These wins raise Nam Cheong’s orderbook to MYR1.5bn on a gross basis. We estimate the net orderbook at MYR1.4bn before 2Q14 recognitions. Global offshore support vessel (OSV)-to-rig ratio falling, implying tight supply. The global OSV-to-rig ratio, excluding aged OSVs, stands at 3.3x, well below the 4.0x considered balanced by the industry. Taking the OSV and drilling rig orderbooks into consideration, this ratio falls further to 3.2x, indicating tighter OSV supply ahead. Nam Cheong’s revenue visibility has grown in recent years, as owners have ordered well ahead of deliveries. Their confidence has been supported by rising charter rates and overall utilisation levels. Recent BTO contracts from Bumi Armada (BAB MK, BUY, FV: MYR4.54), Sentinel Marine and now Perdana Petroleum (PETR MK, BUY, FV: MYR2.20) also reinforce this view. Maintain BUY with a raised SGD0.53 TP (from SGD0.52). We raise our FY15/FY16 earnings estimates by 5% each, as these orders are incremental to our shipbuilding programme assumptions. We raise our TP to SGD0.53 based on 10x blended FY14F/15F P/Es. Maintain BUY. Nam Cheong is one of our Top Picks in the offshore and marine sector. We further note that consensus estimates imply almost zero growth between FY15 and FY16, ie there is upgrade potential should Nam Cheong exceed street expectations.

YTD

1m

3m

6m

12m

Absolute

22.2

4.1

22.2

32.8

45.3

Forecasts and Valuations

Dec-12

Dec-13

Dec-14F

Dec-15F

Dec-16F

Relative

19.3

4.3

15.6

27.5

41.3

Total turnover (MYRm)

877

1,257

1,771

2,382

2,747

Reported net profit (MYRm)

137

206

267

331

373

Recurring net profit (MYRm)

137

193

267

331

373

Recurring net profit growth (%)

46.6

41.6

37.9

24.3

12.5

Recurring EPS (MYR)

0.07

0.09

0.13

0.16

0.18

DPS (MYR)

0.01

0.03

0.03

0.04

0.05

Recurring P/E (x)

13.9

10.7

7.8

6.3

5.6

P/B (x)

3.21

2.23

1.82

1.48

1.23

P/CF (x)

25.8

Shariah compliant

Lee Yue Jer, CFA +65 6232 3898 [email protected]

13.3

12.9

1.3

2.6

3.2

4.0

5.4

EV/EBITDA (x)

14.8

12.1

9.0

7.1

6.2

Return on average equity (%)

25.6

26.9

25.5

25.8

23.9

Net debt to equity (%)

39.4

52.1

51.8

37.9

28.6

10.6

20.5

49.7

Dividend Yield (%)

Our vs consensus EPS (adjusted) (%)

See important disclosures at the end of this report

  2  . 2 0 . 3

0 0 . 3 0 0 Nam Cheong has won contracts for two 500-man accommodation work . 0 barges (AWBs) worth USD84m, bringing its orderbook to MYR1.5bn. 0 The AWBs, plus two options, were sold to Perdana Petroleum. These 0 units are build-to-order (BTO), being incremental to Nam Cheong’s shipbuilding programme. We raise our FY15/16 earnings estimates by 5% each, keep our BUY call and raise TP to SGD0.53 (from SGD0.52).

50

20

   

Source: Company data, OSK-DMG estimates

na

na

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1

Nam Cheong (NCL SP) 23 June 2014

Additional Notes Figure 1: S-Curve revenue recognition model for Nam Cheong’s shipbuilding programme 1/3 ID

Delivery Status by year

Price (USD'000)

2013

1301 1302 1303 1304 1305 1306 1307 1308 1309 1310 1311 1312 1313 1314 1315 1316 1317 1318 1319 1320

2013 AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS PSV PSV PSV PSV PSV PSV PSV PSV AWB AWB AWB AWB

Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered Delivered

32,000 11,900 11,283 11,500 11,500 11,283 12,500 12,500 20,000 19,500 19,500 20,010 30,000 33,400 32,100 19,500 29,500 29,500 29,500 27,800

32,000

1401 1402 1403 1404 1405 1406 1407 1408 1409 1410 1411 1412 1413 1414 1415 1416 1417 1418 1419 1420 1421 1422 1423 1424 1425 1426 1427 1428 1429 1430

2014 AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS PSV PSV PSV PSV PSV PSV PSV PSV PSV PSV AWB AWB MWV MWV MWV MWV ERRV ERRV ERRV AHTS AHTS AHTS

Order Book Order Book Order Book Stock Stock Stock Stock Stock Order Book Order Book Order Book Order Book Order Book Order Book Order Book Order Book Stock Stock Order Book Order Book Order Book Stock Stock Stock Order Book Order Book Order Book BNI Order BNI Order BNI Order

11,283 11,283 11,300 11,200 12,000 12,000 12,000 12,000 31,800 19,500 20,500 20,500 30,000 30,000 30,000 30,000 30,000 32,000 29,500 29,500 29,000 28,000 28,000 28,000 11,775 11,775 11,775 6,120 6,120 6,120

8,703 2,933

2014F

2015F

2016F

8,349 9,200 9,775 8,349 12,500 12,500 4,000 19,500 19,500 16,808 3,340 963 15,588 12,173 19,175 19,175

14,550 15,450 15,450 24,000 7,800 6,000 4,500

26,550 16,225 24,650

2,355 1,766 1,766 5,508 1,224 1,224

1,950 2,065

2,128 8,349 11,300 11,200 12,000 12,000 12,000 12,000 31,800 4,950 5,050 5,050 6,000 22,200 24,000 25,500 30,000 32,000 2,950 13,275 4,350 28,000 28,000 28,000 9,420 10,009 10,009 612 4,896 4,896

Source: OSK-DMG estimates

See important disclosures at the end of this report

2

Nam Cheong (NCL SP) 23 June 2014 Figure 2: S-Curve revenue recognition model for Nam Cheong’s shipbuilding programme 2/3 ID

1501 1502 1503 1504 1505 1506 1507 1508 1509 1510 1511 1512 1513 1514 1515 1516 1517 1518 1519 1520 1521 1522 1523 1524 1525 1526 1527 1528 1529 1530 1531 1532 1533 1534 1535

Delivery Status by year 2015 AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS PSV PSV PSV PSV PSV PSV PSV PSV PSV PSV WB WB WB WB AWB ERRV ERRV ERRV

Stock Stock Stock Stock Stock Stock Stock Stock Order Book Order Book Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Build to Order Build to Order Stock Stock Stock Stock Stock Stock Stock Order Book Build to Order Build to Order

Price (USD'000)

13,000 13,000 13,000 13,000 14,500 14,500 14,500 14,500 14,500 14,500 14,500 14,500 14,500 14,500 14,500 14,500 14,500 21,000 21,000 21,000 21,000 30,000 30,000 32,500 32,500 30,000 30,000 30,000 30,000 30,000 30,000 30,000 13,500 13,500 13,500

2013

2014F

3,380 2,600

11,600 2,320

7,500 3,300

1,200

20,400 22,200 3,600 2,700 25,800

2,025 2,025

2015F

2016F

13,000 9,620 10,400 13,000 14,500 2,900 12,180 14,500 14,500 14,500 14,500 14,500 14,500 14,500 14,500 14,500 14,500 21,000 21,000 21,000 21,000 30,000 30,000 32,500 32,500 2,100 4,500 26,400 27,300 3,000 30,000 30,000 13,500 11,475 11,475

Source: OSK-DMG estimates

See important disclosures at the end of this report

3

Nam Cheong (NCL SP) 23 June 2014 Figure 3: S-Curve revenue recognition model for Nam Cheong’s shipbuilding programme 3/3 ID

1601 1602 1603 1604 1605 1606 1607 1608 1609 1610 1611 1612 1613 1614 1615 1616 1617 1618 1619 1620 1621 1622 1623 1624 1625 1626 1627 1628 1629 1630 1631 1632 1633 1634 1635 1636 1637

Delivery Status by year 2016 AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS AHTS PSV PSV PSV PSV PSV PSV PSV PSV PSV PSV AWB AWB AWB AWB AWB MWV MWV MWV AHTS ERRV ERRV ERRV AWB AWB

Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Stock Build to Order Build to Order Stock Stock Stock Stock Stock Stock Stock Stock Stock BNI Stock Build to Order Build to Order Build to Order Build to Order Build to Order

Price (USD'000)

2013

12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 31,000 31,000 20,000 20,000 30,000 30,000 30,000 30,000 30,000 32,500 32,500 32,000 29,500 29,500 29,500 29,500 29,500 28,000 28,000 28,000 5,712 13,500 13,500 13,500 42,000 42,000

2014F

2015F

2016F

10,800 3,120

540 540 2,520 1,260

11,610 11,610 31,080 5,460

1,200 8,880 12,000 12,000 8,880 2,400 10,080 10,080 12,000 12,000 12,000 31,000 31,000 16,800 16,800 30,000 30,000 30,000 30,000 2,100 32,500 32,500 32,000 24,780 24,780 25,960 29,500 29,500 23,520 24,640 25,480 5,712 13,500 1,350 1,350 8,400 35,280

3,120 9,600 1,920 1,920

3,200 3,200

27,900

4,720 4,720 3,540

4,480 3,360 2,520

Model Revenue (USD'000)

2013 415,550

2014F 519,469

2015F 737,230

2016F 853,896

USD-MYR

2.99

3.30

3.30

3.30

Model Revenue (MYR'000)

1,241,229

1,714,247

2,432,859

2,817,857

Source: OSK-DMG estimates

See important disclosures at the end of this report

4

Nam Cheong (NCL SP) 23 June 2014

Financial Exhibits Profit & Loss (MYRm)

Dec-12

Dec-13

Dec-14F

Dec-15F

Total turnover

877

1,257

1,771

2,382

2,747

Cost of sales

(688)

(993)

(1,407)

(1,925)

(2,239)

Gross profit

189

264

364

457

508

Gen & admin expenses

(50)

(66)

(81)

(101)

(111)

Operating profit

139

199

283

356

397

Operating EBITDA

144

212

299

373

416

(13)

(15)

(17)

(18)

139

199

283

356

397

Net income from investments

3

3

2

6

6

Other recurring income

5

9

9

9

9

(8)

(11)

(18)

(28)

(26)

Depreciation of fixed assets Operating EBIT

(6)

Interest expense Exceptional income - net

-

Pre-tax profit

139

Taxation

13 (2)

212

Dec-16F

-

-

-

277

344

386 (12)

(6)

(8)

(10)

(1)

(2)

(2)

Minority interests

-

Profit after tax & minorities

137

206

267

331

373

(2)

Reported net profit

137

206

267

331

373

Recurring net profit

137

193

267

331

373

Dec-12

Dec-13

Dec-14F

Dec-15F

Dec-16F

139

199

283

356

397

6

13

15

17

18

(60)

(419)

(292)

(193)

(232)

Source: Company data, OSK-DMG estimates

Cash flow (MYRm) Operating profit Depreciation & amortisation Change in working capital Other operating cash flow

10

10

11

15

15

Operating cash flow

95

(197)

18

195

199 (26)

Interest paid

(17)

(34)

(18)

(28)

Tax paid

(5)

(0)

(8)

(10)

(12)

Cash flow from operations

74

(231)

(8)

157

162

Capex

2

(36)

(45)

(30)

(31)

Other investing cash flow

(8)

(81)

-

-

-

Cash flow from investing activities

(6)

(117)

(45)

(30)

(31)

Dividends paid

(9)

(26)

(55)

(67)

(83)

-

-

Proceeds from issue of shares

-

119

Increase in debt

145

401

Other financing cash flow Cash flow from financing activities Cash at beginning of period Total cash generated

(4)

(1)

50 -

50 -

493

27

216

362

304

414

199

145

(58)

110

(103)

(12)

Implied cash at end of period

215

5 366

(17)

-

132

Forex effects

(5)

(150) (233)

-

-

-

304

414

312

Source: Company data, OSK-DMG estimates

See important disclosures at the end of this report

5

Nam Cheong (NCL SP) 23 June 2014

Financial Exhibits Balance Sheet (MYRm)

Dec-12

Dec-13

Dec-14F

Dec-15F

Total cash and equivalents

216

362

304

414

312

Inventories

454

751

964

1,055

1,227

Accounts receivable

452

635

873

1,174

1,354

Other current assets

29

51

51

51

51

Total current assets

1,151

1,799

2,192

2,694

2,944

Tangible fixed assets

145

290

320

333

346

17

90

90

90

90

161

380

410

423

435

Total other assets Total non-current assets Total assets

Dec-16F

1,313

2,179

2,602

3,117

3,379

Short-term debt

155

242

292

342

192

Accounts payable

257

381

540

738

859

0

5

5

5

5

Total current liabilities

413

628

837

1,086

1,056

Total long-term debt

294

609

609

609

609

13

4

4

4

4

Total non-current liabilities

307

613

613

613

613

Total liabilities

720

1,241

1,450

1,698

1,669

Share capital

370

488

488

488

488

Retained earnings reserve

231

411

623

887

1,177

Other current liabilities

Other liabilities

Other reserves

(9)

39

39

39

39

938

1,150

1,414

1,704

-

1

3

5

7

-

0

0

0

0

592

939

1,153

1,419

1,710

1,313

2,179

2,602

3,117

3,379

Shareholders' equity

592

Minority interests Other equity Total equity Total liabilities & equity Source: Company data, OSK-DMG estimates

Key Ratios (MYR)

Dec-12

Dec-13

Dec-14F

Dec-15F

Dec-16F

Revenue growth (%)

44.6

43.5

40.9

34.5

15.3

Operating profit growth (%)

36.7

43.5

42.5

25.7

11.5

Net profit growth (%)

46.6

50.5

29.7

24.3

12.5

EPS growth (%)

46.6

37.7

28.9

24.3

12.5

Bv per share growth (%)

24.9

44.1

22.6

23.0

20.5

Operating margin (%)

15.8

15.8

16.0

15.0

14.5

Net profit margin (%)

15.6

16.4

15.1

13.9

13.6

Return on average assets (%)

12.0

11.8

11.2

11.6

11.5

Return on average equity (%)

25.6

26.9

25.5

25.8

23.9

Net debt to equity (%)

39.4

52.1

51.8

37.9

28.6

DPS

0.01

0.03

0.03

0.04

0.05

Recurrent cash flow per share

0.04

(0.11)

(0.00)

0.07

0.08

Source: Company data, OSK-DMG estimates

See important disclosures at the end of this report

6

Nam Cheong (NCL SP) 23 June 2014

SWOT Analysis  The world’s largest offshore supply vessel (OSV) builder by vessels delivered

 New competition from China’s merchant vessel builders

 Partnerships with yards make for an asset-light and capacity-flexible model, helping it to weather lean times  The “letter of authorisation” system in Malaysia protects Nam Cheong’s key market

 Asean countries are rapidly boosting exploration and production (E&P) capex  The industry is currently in a major upswing due to massive rig orders

 The company’s build-to-stock model is deemed risky by investors, although this is mitigated by its record orders on hand, asset-light strategy and dominant industry position in Malaysia

P/E (x) vs EPS growth

P/BV (x) vs ROAE

22%

10

8%

P/E (x) (lhs)

EPS growth (rhs)

Source: Company data, OSK-DMG estimates

Jan-16

Jan-15

Jan-14

Jan-13

0

-6%

Jan-12

5

-20%

23.3%

3.0

20.0%

2.5

16.7%

2.0

13.3%

1.5

10.0%

1.0

6.7%

0.5

3.3%

0.0

0.0%

P/B (x) (lhs)

Jan-16

15

26.7%

3.5

Jan-15

36%

30.0%

4.0

Jan-14

20

4.5

Jan-13

50%

Jan-12

25

Return on average equity (rhs)

Source: Company data, OSK-DMG estimates

Company Profile Nam Cheong (NCL) is the largest offshore support vessel (OSV) builder in the world with a 12% share of the global shallow-water OSV market. It specialises in building small-mid anchor handling tug supply (AHTS), platform supply vessels (PSVs), workboats and accommodation barges. It also operates a fleet of standby vessels and a number of OSVs in conjunction with its partners.

See important disclosures at the end of this report

7

Nam Cheong (NCL SP) 23 June 2014

Recommendation Chart Price Close 0.48 0.48 0.52

0.41

0.45

0.45

0.37 0.38

0.35

0.34

3.0

0.39

3.5

0.35

0.33 0.33 0.35 0.34

0.30

Recommendations & Target Price

0.29

4.0

NR

4.5

2.5 2.0

1.5 1.0

0.5 Buy 0.0 Jun-09

Neutral

Sell

Oct-10

Trading Buy

Jan-12

Take Prof it

Not Rated

Apr-13

Note: NCL listed via RTO in May 2011. Previous stock prices pertain to Eagle Brand Holdings and are irrelevant. Source: OSK-DMG estimates, Bloomberg Date

Recommendation

2014-05-15

Buy

Target Price Price 0.52

0.38

2014-03-31

Buy

0.48

0.34

2014-02-26

Buy

0.48

0.34

2014-02-20

Buy

0.45

0.34

2014-01-29

Buy

0.45

0.32

2013-12-31

Buy

0.45

0.32

2013-12-30

Buy

0.45

0.32

2013-11-13

Buy

0.41

0.29

2013-10-01

Buy

0.39

0.29

2013-09-19

Buy

0.38

0.28

Source: OSK-DMG estimates, Bloomberg

See important disclosures at the end of this report

8

RHB Guide to Investment Ratings DMG & Partners Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share may10% exceed over 12 themonths next 3 months, however longer-term outlook remains uncertain Buy: Share price mayprice exceed over15% the next Neutral: Buy: ShareShare price price may fall within the 15% rangeover of +/the next 12 months Trading may exceed the10% nextover 3 months, however longer-term outlook remains uncertain Take Profit: Target been attained. accumulate lower Neutral: Share priceprice may has fall within the rangeLook of +/-to10% over theatnext 12 levels months Sell: may fall has by more 10% over next 12 months Take Share Profit:price Target price beenthan attained. Look the to accumulate at lower levels Not Rated: is not regular coverage Sell: Share Stock price may fallwithin by more thanresearch 10% over the next 12 months Not Rated: Stock is not within regular research coverage Disclosure & Disclaimer DISCLAIMERS All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as & to Partners its accuracy, completeness or correctness. No distribution part of this only. reportIt is to be an offer or solicitation of an offer This research is issued by DMG Research Pte Ltd and it is for general does notconstrued have anyas regard to the specific investment to transact financial any securities or and financial instruments referred to herein otherwise. 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