Nam Cheong announced that it has won a USD72.1m contract for six vessels - two anchor handling tug supply vessels (AHTS) and four emergency response and rescue vessels (ERRVs). While the AHTS were within our shipbuilding model, the four ERRVs are a pleasant surprise. With an extremely strong orderbook, Nam Cheong is a growth stock at value multiples. We raise our TP from SGD0.34 to SGD0.35.

BTO vessels provide greater visibility. Nam Cheong's earnings were historically very lumpy with large surges in quarters of strong sales. The buildto-order (BTO) vessels (so far, the four ERRVs plus the four Bumi Armada PSVs) provide greater visibility to future earnings, which we believe will boost investor confidence and contribute to a re-rating of the stock. Also, we will be similarly positive should Nam Cheong enter into more long-term vessel chartering operations, as these provide high recurrent income and cashflows.

OSV cycle in full upswing. At the macro level, we are very positive on the OSV segment. OSVs tend to be ordered a year after rigs, and FY12's massive rig orders provide the fundamental demand. The oversupply of small AHTS has been consumed and the market is back in balance, as evidenced by healthy
rates and rapid sales (Nam Cheong now has no more 5150bhp AHTS for 2013 delivery). Equipment and steel prices remain stable at low levels, thus ship owners who buy today stand to benefit from rising rates without rising costs. The replacement cycle is not yet complete, and there is incremental new demand for OSVs as more exploration and production move offshore.

Growth stock at value multiples. Last year, Nam Cheong delivered a 47% net profit growth, and this year we are forecasting a 33% jump. The stock still trades at 7.4x FY13F EPS, which does not do justice to the largest OSV builder this half of the world with a global 10% market share.

TP lifted to SGD0.35, maintain BUY. Following the order win, we raise our FY13-14F EPS by 1%-2%. Nam Cheong remains one of our top picks in the small-cap oil & gas space, and our 10x P/E valuation is at a large 33% discount to rig builders Keppel and SMM. Maintain BUY.

Source: OSK