Nam Cheong delivered  such  a stellar 3Q14 PATMI of MYR126m  that  its 9M14  PATMI  has  met  93%/99%  of  our/street  FY14  forecasts,  as shipbuilding  margins  surged  to  24%  from  the  17-20%  range.  Maintain BUY. We raise our TP to SGD0.61 from SGD0.58 (49% upside) as we roll over to a higher weight on FY15F earnings, offset by a lower 9x (from 10x) multiple as a concession to market sentiment. We also raise FY14-16 forecasts by 11-13% as we increase margin assumptions.  

Home run quarter. Nam Cheong's 3QFY14 PATMI is nearly as high as FY12's bottomline, in a sign of how far the company has come within two years. Revenue this quarter  was particularly high as a record 16 vessels were sold, compounded by a margin surge  to 24% from  17-20%  in  the previous four quarters. Net gearing stood at a healthy 44.6%.

Shallow-water  developments  to  surge  according  to  IHS-Petrodata. The number of shallow-water developments could grow steadily to 593 in 2020  from  76  in  FY15  (See  Figure  2),  according  to  IHS-Petrodata, requiring shallow-water vessels which are Nam Cheong's specialisation. This is in line with our view that the lower oil prices are unlikely to have a significant impact on shallow-water operations, or future sales. 

Raise FY14-16  estimates  by  11%/11%/13%.  Nam Cheong's  prospects look  bright  with  a  net  orderbook  of  MYR1.4bn  (a  figure  which  has remained  stable  over  the  last  three  quarters  even  a fter  MYR1.4bn  in revenue recognitions), with strong sales prices combining with improved yard  efficiencies  resulting  in  margin  boosts.  We  raise  margin assumptions  in  each  year  by  up  to  1.5ppts,  resulting  in  our  FY14-16forecasts  rising  by  11-13%.  Our  FY14F  PATMI  implies  a  conservative MYR50m bottomline for 4Q14. 

Citius,  Altius,  Fortius  (Faster,  Higher,  Stronger).  Like  an  Olympic competitor  pushing  his  performance  limits,  we believe Nam  Cheong has yet  to  hit  peak  earnings,  with  the  20  diesel-electric  vessels  to  begin contributions next year and margins still holding strong.  The stock trades at  compelling  valuations  of  5.7/4.9x  FY15/16F  P/E  and  with  ROEs improving towards 30%. We raise our TP to SGD0.61 (from SGD0.58) as we roll over to a heavier weightage on  FY15F earnings, but make a concession to the weaker market sentiment by adjusting our P/E multiple to  9x  from  10x.  Maintain  BUY.  Nam  Cheong  remains  one  of  our  Top Picks in the sector. 

Source: OSK-DMG