• Customers looking to cut capex
• Not a good time for speculative building
• Downgrade to HOLD

Petronas looking to cut capex by 15-20% in 2015

Last week, Petronas announced that it is looking to cut capital expenditure for new projects by 15-20% next year should oil prices remain low. The earlier RM300b capex planned for 2011-2015, or RM60b a year, was made on the assumption of oil prices at $80/bbl. Though Nam Cheong has enjoyed a more diversified customer profile over the years such that Malaysian customers accounted for only about 20-30% of YTD vessel sales, the fall in oil price is a global event and should impact all of Nam Cheong’s customers.

Hard to fight the tide

Nam Cheong has been a standout performer in terms of order wins and earnings this year, but it will not be immune to any industry slowdown. To date, it has sold 27 vessels out of the 30 vessels that are scheduled for delivery this year. For 2015, it is looking to deliver 35 vessels, and 14 have been sold. Should an industry downturn be worse than expected, the group would face higher risks on margins and even the possibility of unsold vessels. On a more positive note, the group’s vessels operate in shallow waters which are more resilient to any cutbacks in capital expenditure. So far, we have not seen any production-related cutbacks. As such, risks of order cancellations for Nam Cheong’s RM1.4b order book look low at the moment.

Downgrade to HOLD

During an upcycle, we estimate that the group is able to sell its vessels nine to 12 months prior to delivery, and about four to six months during “normal” times. During the previous downturn, the worst the group experienced was a sale one month prior to delivery – the group has not been stuck with unwanted vessels yet. Still, with the broader industry slowdown and sector de-rating, we deem it necessary to lower our P/E for Nam Cheong from 9.5x to 7x, and based on FY15F earnings, our fair value estimate drops to S$0.38. Downgrade to HOLD.

Source: OCBC Research - 9 Dec 2014