09 August 2014

Nam Cheong Posted 76% Increase in Net Profit - August 2014

Net Profit: RM134m + 76%
  Revenue: RM786m + 54%

1H EPS: RM 0.049
    NAV: RM 0.476

Expected Annaulized ROE : 20% - 25% (Good)
Total Debt to Asset Ratio: 56% (A bit high, although it is a norm for shipbuilding company to leverage on borrowings in order to boost up the ROE)


Company Review

Gross profit increased by 57%, from RM97.5 million for 1H 2013 to RM153.2 million recorded for 1H 2014, which is in tandem with higher revenue recorded. The gross profit margins for 1H 2014 and 1H 2013 were consistent at 19%. The shipbuilding segment's gross profit margin were maintained at the range of 17% to 19%. However, the vessel chartering segment's gross profit margin was lower at 33% in 1H 2014, due to chartering-in of a vessel to fulfill a time charter contract as the Group's vessel which was intended to perform this charter was then unavailable.

Other income was higher for 1H 2014 as compared to 1H 2013 due to fair value gain on derivatives of RM7.5 million and net foreign exchange gain of RM4.1 million.

Selling and administrative expenses increased by RM5.0 million in 1H 2014 due to share and cash plan expenses while finance cost was consistent with 1H 2013.

Share of profit in jointly controlled entities recorded a gain of RM3.1 million as more assets have been deployed by the jointly controlled entities.

As a result of the rise in overall revenue, net profit after taxation for 1H 2014 of RM134.4 million, was 75% higher as compared to RM76.8 million in 1H 2013.


Company Outlook Comment

The global and regional outlook of the Exploration and Production (“E&P”) sector remains upbeat, with
global spending expected to reach a new record of US$723 billion in 2014 before hitting US$1 trillion in
20171.

The increased activities by oil majors in 2014 have benefited the Group so far, as evident by the order wins of 13 vessels worth approximately US$290 million (year-to-date). Our order book value, as at 1 July 2014,
stood at approximately RM1.7 billion, comprising a mix of OSVs for shallow and deep water operations that
are due for deliveries up to 2015.

Within Asia-Pacific, Malaysia is expected to exhibit a robust performance in the medium term. As a key
driver in Malaysia’s oil and gas industry, Petronas seeks to rejuvenate mature assets and develop marginal
oilfields, having pledged US$14 billion to enhanced oil recovery projects2. This development allows us to
capitalise on our strong links with oilfield service companies in Malaysia which will enable us to secure
vessel orders.

In addition, the global OSV fleet is ageing with over 30% of vessels being of traditional build and in
operation for over 25 years3. In order to cope with the present-day operational demands, operators and
charterers are looking to replace older vessels with modern variants that are better-equipped to do their jobs
more efficiently.

Going forward, we believe that increased investments by these oil majors will benefit us, as we continue to
see demand for AHTS vessels, and other offshore vessels, especially in the shallow water region. The
demand for small size AHTS vessels remains strong as offshore service providers replace older vessels with
new and higher specification vessels. As one of leading players in the construction of mid size PSVs, we are
able to benefit from the growing demands in this sector of the industry as well.


My Notes

Nam Cheong has good working relationship with Petronas as it is one of the biggest OSV builders in Malaysia. With Petronas targeting to have US$14 billion capex budget, I believe Nam Cheong can be benefited from there.

The key risk here is the Build-To-Stock business model that the company is doing now. The management claimed that this business model is workable as it has strong relationship with customers and they can build the vessels faster than other builders when the customers need it urgently. It also brings higher profit margin compared to Build-To-Order business model.

The other risk is whether the fluctuated crude oil price could support current E&P activities.

With expected PE ratio of 11X - 12X this year, I believe it depends on the order winning momentum to keep the company in reasonable price range. My most favorite counter in O&G sector is still Ezion at this moment.

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