Risk-taking to pay off, initiate with BUY. We initiate coverage on Nam Cheong with a BUY rating and TP of SGD0.37, pegged to 9x PER on average FY13-15F EPS. We see Nam Cheong benefiting from (1) a recovering Offshore Support Vessel (OSV) market, (2) OSV replacement cycle, (3) Petronas’ Oil & Gas capex and (4) its foresight in reading the supply-demand dynamics of the sector. We expect the company to deliver 16% EPS CAGR over FY13-15F as vessels in its ramped-up newbuild programs are readily absorbed by the market.

Build-to-stock (BTS) – the right model to ride the recovering cycle. We expect the OSV ordering cycle to turn positive and in our view, Nam Cheong possesses the right model to capitalise on this cyclical upswing. By building vessels on a speculative basis, Nam Cheong will have available vessels ahead of shipyards which build only upon receiving orders. This model has also allowed Nam Cheong to charge premium prices and deliver higher-than-peer margins.

Leveraging on the ties that bind. As the largest domestic OSV builder in Malaysia, Nam Cheong has established close ties with the country’s leading OSV owners, which include Bumi Armada, Perdana Petroleum and Icon Offshore, who are Petronas-licensed operators. Consequently, Nam Cheong stands to benefit indirectly from Petronas’ MYR300b (USD100b) capex spending plan over 2011-2015.

Unfailing record in vessel sales to boost record revenue in FY14F. Nam Cheong has demonstrated a strong ability to read market demand with a track record of selling all pre-built vessels before delivery. The 28 vessels to be built for 2014 is a big ramp-up over the 19 vessels for 2013 and it has already sold 57% of the 2014 vessels. Outstanding orderbook stands at MYR1.7b. We forecast 2015 program to be on a similar scale as 2014. If it can maintain its track record of selling all vessels before they are delivered, we forecast record sales close to MYR2.0b in FY14F.

Inexpensive valuations, potential for higher yield. At current share price, stock is trading at only 6.1x/6.6x FY14F/15F PERs, inexpensive considering the robust growth prospects. We also see possibility of higher dividend payout in FY14F translating into a yield of about 5%.  

Source: Maybank Kim Eng Research - 23 Oct 2013