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UOBKH lowers Yangzijiang Shipbuilding's GPM assumptions to account for inflation

·3-min read

The brokerage has also lowered its earnings forecasts for the FY2022 to FY2024 by 5.2%-14.8%.

UOB Kay Hian analyst Adrian Loh has kept his “buy” call on Yangzijiang Shipbuilding (Holdings) or YZJ after the Mainboard-listed group reported an operationally strong set of numbers for the 1HFY2022 ended June 30.

“YZJ reported 1HFY2022 revenue growth of 70% to RMB9.7 billion ($1.98 billion), which resulted in a 32% y-o-y increase in net profit from continuing operations to RMB1.2 billion,” notes Loh who has kept his target price unchanged at $1.16.

“We have used an 8x and 5x multiple for its shipbuilding and trading & other business segments respectively, thus arriving at a $1.14 and 4 cent/share valuation for these two segments,” the analyst writes.

“By using publicly-sourced replacement cost for its shipping assets, we value this segment at RMB4.8 billion or 26 cents/share – this is double that of the company’s carrying cost of these assets, or 3x higher than its book value of 9 cents as at end-FY2021. At our target price, YZJ would trade at a FY2022 P/E of 6.9x which we do not view as stretched,” he adds.

YZJ currently trades at an inexpensive valuation of 5.4x FY2023 P/E. This is an 18% discount to and 1 standard deviation (s.d.) below its five-year average of 6.6x, the analyst says.

YZJ, in keeping with its guidance, delivered 35 vessels during the 1HFY2022, which is ahead of its previous 2022 delivery target of 60 vessels on a run-rate basis.

“In our view, YZJ is highly likely to achieve its new target of 70 vessels. At the bottom line, however, results missed expectations due to fair value loss on currency hedges,” the analyst writes.

In his report, Loh has lowered his earnings forecasts for the FY2022 to FY2024 by 5.2%-14.8%. He has also lowered his gross profit margin assumptions for all three of the company’s business segments by 0.5 percentage points to account for higher-than-expected cost inflation.

In the 1HFY2022, YZJ’s shipbuilding margin stood at 12.8%, slightly lower than Loh’s FY2022’s forecast of 13.5%, even though margins were sequentially higher than the 10.8% margin seen in the 2HFY2021. This half-year, YZJ’s lower-than-expected margin was due to higher material costs, note the analyst.

“We also highlight that our earnings downgrade for 2022 principally relates to fair value losses from currency hedging, both at the company and at the associate/joint venture level,” he says.

Catalysts to YZJ’s share price, in Loh's view, include the evidence of margin expansion from the 2HFY2022 onwards, as well as new orders in higher margin segments such as dual-fuel containerships or liquefied petroleum gas (LPG) tankers.

As at 2.46pm, shares in YZJ are trading 1 cent higher or 1.07% up at 94.5 cents.

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