Analysts’ Breakdown: Nam Cheong’s Record 2012

Malaysia’s largest offshore shipbuilder, Nam Cheong ended 2012 with a record number of vessels sold. In December 2012, it had secured the sales of three vessels worth US$56.4 million. This brings the shipbuilder’s total tally to 21, a record high in its corporate history. Of note, the contract wins would bring Nam Cheong’s order book well over the RM1 billion threshold ($578 million). Notwithstanding this, Nam Cheong also signed letters of intent for four additional vessels valued at US$130 million in mid-2012.

It would thus seem that Nam Cheong is feeding off the surging demand for offshore vessels as oil companies continue to focus on executing existing projects and bringing new reserves (oil fields) into production. This is particularly so, given that oil prices have remained sustainably high (WTI light crude oil trading at around US$95.40 per barrel and Brent crude trading at around US$111.85 per barrel at the point of writing).

Against such a bright backdrop, can Nam Cheong deliver the goods? Analysts from various research houses weigh in.

Gerald Wong and Louis Chua of Credit Suisse drew particular emphasis on Nam Cheong’s operating model in their research report. The Build to Stock (BTS) model has been in operation at Nam Cheong since 2006 and they write,

“… where market research and feedback from key customers and industry players are used to forecast OSV (vessel) demand, with construction of OSVs undertaken in advance of orders to minimise order-delivery lead times. Management noted that this allowed Nam Cheong to have a competitive edge over its peers and secure attractive margins.”

An astute investor would note that this model can be particularly risky if management does not keep up with market trends and demand. However, it would seem that Nam Cheong has been particularly clever in ensuring that the ships it builds to stock have capabilities that are in demand, uses branded equipment as well as have proven designs that are widely accepted. This ensures that Nam Cheong is able to take full advantage of its competitive strength.

Noting that Nam Cheong often sells vessels three to six months before completion (testament of its BTS operating model) , Tan Jun Da and Nancy Wei of UOB-Kay Hian expects a larger-than-forecasted 2014 shipbuilding programme to keep up with demand. They write,

“We expect Nam Cheong will continue to focus on shallow-water, mass market vessels in 2014, which are highly marketable and widely accepted by oil majors globally.”

Tan and Nancy’s Call: BUY , with target price of $0.34 (potential upside of 33.3 percent)

Further adding wood to the proverbial fire, Lee Yue Jer of OSK Securities mentions that Nam Cheong inventory is fast-moving.

“Nam Cheong has already sold 9 out of 19 vessels scheduled for delivery in 2013, and with these sales, four out of our forecast 20 vessels for 2014 have already been sold.”

Lee’s Call: BUY , with target price of $0.33 (potential upside of 29.4 percent)

With such fast moving inventory, it will be little wonder if Nam Cheong expands its shipbuilding programme in 2014.

However, there is of course a risk, highlighted earlier, that the vessels Nam Cheong builds under its BTS model, does not sell. This risk has been allayed somewhat with possibly an upswing in demand for more vessels as Chia Jiunyang and Low Pei Han of OCBC Research puts it,

“As Petronas catches up on its projected expenditures, we believe there will be more order flow for Malaysian offshore players in 2013-14.”

Chia and Low’s Call: BUY , with target price of $0.30 (potential upside of 17.6 percent)

The recent fund raising exercise by Nam Cheong with the issuance of medium term notes could also help support growth as Suvro Sarkar of DBS Vickers writes,

“We remain comfortable with our projection of close to 30 percent earnings CAGR (compounded annual growth rate, i.e. how much Nam Cheong’s earnings will grow annually based on historical figures) over FY11-13.”

Suvro’s Call: BUY , with target price of $0.30 (potential upside of 17.6 percent)

Given that it is rather cheap in terms of absolute amounts ($0.26 per share at point of writing), perhaps investors would be tempted to part with some cash. That aside, the counter is an interesting one to look out for in 2013 as in the overall oil and gas sector.

Editor’s note:
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