• 1Q14 earnings beat expectations
• Robust momentum to continue
• Raise FV and reiterate BUY

Strong start to FY14

Nam Cheong Limited reported a robust set of 1Q14 results, with revenue soaring 73.5% YoY to MYR407.3m and PATMI jumping 98.7% to MYR71.1m. This constituted 22.8% and 29.1% of our FY14 forecasts, respectively. Even after adjusting for exceptional items, estimated core PATMI came in at MYR66.0m (+118.9% YoY), forming 27.0% of our full-year earnings projection and ahead of our expectations. Both of Nam Cheong’s core segments performed well, with revenue for its Shipbuilding and Vessel Chartering division surging by 68% and 274% YoY, while gross profit also spiked up by 94% and 131%, respectively. As such, 1Q14 gross margin came in at 21.2%, above the 18.6% achieved in 1Q13. Shipbuilding margins were particularly solid (20.1%), and management attributed this to an uptick in market demand, especially in areas such as Malaysia, Mexico, West Africa and Middle East. Nam Cheong has sold seven vessels YTD, and MYR1.2b of its order book (23 vessels) remains unrecognised as at end 1Q14.

Continue focus on shallow water vessels

Nam Cheong’s 2015 shipbuilding programme comprises of 35 vessels with an estimated value of US$700m. This can be broken down into 17 AHTS (5k-6k BHP), three ERRVs, 10 PSVs (3k-4.5k DWT), one Accommodation Work Barge and four Accommodation Workboats. Focus will remain on the shallow water regions. Despite lingering concerns regarding the oversupply of PSVs in the market, management highlighted that demand appears to be absorbing the supply and the PSV market may continue to surprise positively. It also believes the development of more modern rigs would lead to increased requirements for larger AHTS. Hence, Nam Cheong’s 2015 shipbuilding programme is skewed towards the 6k BHP AHTS (13 newbuilds) as compared to the 5k BHP AHTS (four newbuilds).

Maintain BUY

We lift our FY14 and FY15 PATMI forecasts by 4.8% and 1.7%, respectively. We expect Nam Cheong’s vessel sales momentum to gain further traction ahead, which would be a re-rating catalyst for the stock. Maintain BUY, with a higher fair value estimate of S$0.445 (previously S$0.42), pegged to 9.5x FY14F EPS.

Source: OCBC Research - 16 May 2014