Nam  Cheong  sold  two  vessels  for  c.USD45m  and  we  note  that  its shallow water vessel price  tag remain unchanged despite collapsing oil prices.  Maintain  BUY,  with  TP  adjusted  to  SGD0.58  (from  SGD0.61, 87.1% upside) as we lower our P/E multiple to 8x (from 9x). We note that these prices  point to the  segment's  resilience and  its business model. Valuations are compelling at 5.6x/4.3x FY14/15F P/Es  after  pricing in a bear case scenario.  

Sale of vessels worth USD45m in  a low oil price environment.  Nam Cheong  secured  sales  contracts  for  a  6,000  brake  horsepower  (bhp) anchor handling towing supply  (AHTS) vessel and  a 5,000  deadweight tonnage  (dwt)  platform  supply  vessel  (PSV)  from  repeat  customers Vroon  BV  and EA Temile Development Co  of Nigeria respectively. With these  contracts,  its  orderbook  stands  at  c.MYR1.7bn,  comprising  26 vessels.

Shallow water segment remains  resilient to oil price volatility.  Nam Cheong's ability to secure these two contracts indicates that the shallow water  segment remains resilient  against the  drop  in  oil  prices. We  see heavier  cuts  in  deepwater  where  costs  are  c.USD40-80/barrel  (bbl)  vsshallow  water expenditure where costs are USD25-50/bbl.  Furthermore, its  build-to-stock  model  should  benefit  in  the  current  climate  wherecustomers prefer to secure contracts ahead of ordering vessels.

Bear case scenario priced in. In a bear case scenario, Nam Cheong's shipbuilding  margin  falls  to  10%  from  24%  in  3Q14  and  our  current 19.5%  (FY15F)  and  19%  (FY16F)  estimates  with  FY15F/FY16F  profits falling to MYR169m/MYR199m respectively. The current SGD0.31/share price implies 9x bear case earnings.

Compelling  (re-)entry  valuations.  Valuations  are  compelling  at 5.6x/4.3x  FY14/15F  P/Es  with  58/31%  earnings  growth  in  those  yearsrespectively.  Our  TP  is  adjusted  to  SGD0.58  (from  SGD0.61)  as  we lower our P/E multiple to 8x  (from 9x), rolling over to FY15F earnings  to reflect  the weaker market sentiment.  Lower oil prices will force high-cost marginal playrs (heavy oil and some shale oil producers) to cut capex. This should lead to lower supply in 2H15 from  these  sources and move the  oil  market  towards  equilibrium.  One  near-term  catalyst  will  be  the launch of Nam Cheong's first diesel-electric PSV in FY15. 

Source: OSK-DMG