Nam Cheong - Marginally profitable in 3Q15‏

• Revising estimates lower

• No new vessel sales since Mar

• Avoid for now

RM6,000 net profit in 3Q15
Nam Cheong reported a 69% YoY fall in revenue to RM189.3m and close to a 100% fall in net profit to RM6,000 in 3Q15, compared to net profit of RM126.3m in 3Q14 and RM10.7m in 2Q15. This brings 9M15 net profit to RM50.0m, accounting for just 33% of our full year estimate. Results were below ours and the street’s expectations, and we have cut our FY15/16 earnings by 57% and 50%, respectively.

Chartering saw a gross loss
On a segmental breakdown, shipbuilding revenue in 3Q15 was down 69% YoY but up 2% QoQ at RM182.1m, while gross margin for this segment declined from 24.0% in 3Q14 and 15.3% in 2Q15 to 14.3% in 3Q15. Vessel chartering revenue was also down 70% YoY and 47% QoQ at RM7.1m and this segment went into a gross loss in the quarter. The group added one AHTS vessel (currently on-hire) to the fleet in 3Q15, bringing the total fleet size to 17.

Deferments in deliveries likely
As in 2Q15, there were no vessel sales; YTD there had only been two sales in Mar worth RM212m. The group still has eight unsold vessels for this year under its shipbuilding programme, of which five are PSVs, two are AHTS vessels and the remaining one an accommodation work barge. Besides these eight, there are seven vessels that the group sold earlier and scheduled to be delivered by the end of this year. As the offshore market remains quiet, there are likely to be deferments in deliveries for the 15 vessels.

Technical Analysis
Daily Chart
Hard to beat the tide
Meanwhile, the group had an order book of about RM1.4b (as at end 3Q15), of which RM880m remains unrecognised (~25% to be booked this year).Though Nam Cheong’s share price has corrected ~50% since our downgrade to Sell in mid-May, tougher times could lie ahead for the group. Due to weak earnings visibility, we switch our valuation to 0.65x P/B to account for the low ROE, and weak outlook which would affect vessel values and may result in potential losses. As such, our fair value estimate slips from S$0.17 to S$0.14. Maintain SELL. (Read Report)

Read Related Reports
1) Nam Cheong Ltd - Stuck in the doldrums by DBS Group Research, published on 16 November 2015

2) More downside risks from depleting orderbook On by KGI Fraser Research, published on 16 November 2015

3) Nam Cheong Ltd - Brace for a longer winter by Maybank Kim Eng Research, published on 16 November 2015

4) Nam Cheong - Winter Soldier, Soldiering On by RHB Research, published on 16 November 2015

5) Nam Cheong - From record breaker to heart breaker by CIMB Research, published on 15 November 2015

Source : OCBC Investment Research

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