TWO GLOBAL brokers -- BOA Merrill Lynch and Credit Suisse -- yesterday hiked target prices for Yangzijiang Shipbuilding but these are quite far apart at 2.12 sgd and 1.60 sgd, respectively.
BOA Merrill Lynch's is near the high end of a wide range of analysts' targets. Barclays Research has the highest target of 2.20 sgd. (For others, see our recent story YANGZIJIANG: Profit And Dividend Rise - Stock Is A Sell, Hold Or Buy?)
BOA Merrill Lynch raised its target from $2.02 to $2.12 and reiterated its 'buy' call.
It said: “Our reiteration is driven by the following potential share price catalysts: 1) rigbuilding order wins surprise in 2H12 (despite skeptical market view); 2) the Street’s FY12E profit upgrade, latest by August 2012, and 3) the return of mega-containership orders in mid-2012.”
It added that its latest report on Yangzijiang attempts to reinforce BOA Merrill Lynch’s optimism on YZJ’s earnings visibility in FY12-13, and present a more realistic picture of its new source of earnings by introducing the brokerage’s FY14 forecast.
“The Street has surprisingly not raised its earnings forecast for FY12, post YZJ’s recent CNY4bn FY11 net profit, which was spot on with our estimate but beat consensus by 7.8%.
"Our 26% above-consensus FY12E net profit rests on the recognition of high-margin order backlog, and we expect the strong 1H12 results to force the Street to play catch up with us.”
BOA Merrill Lynch pointed to three potential new earnings sources from FY14:
1) the potential shipbreaking boom – as 27% of dry bulk carriers globally will be 20 years or older in the next five years, amid low freight rates
2) the likely maiden rigbuilding contract wins in 2H12 – with YZJ’s chances boosted by the Chinese government’s support and Qatar Investment Corporation’s relationship with offshore players in the Middle East
3) rising idle ratio, better freight rates, and lower newbuild prices – which could attract the usually ill-disciplined owners to place mega-containership orders from mid-2012.
“We like Yangzijiang as a shipyard that constantly succeeds in improving an already-high productivity level, which sustains its above-industry-average profit margins.”
YANGZIJIANG is a potential 3-bagger
Credit Suisse: ‘Outperform’ Call Maintained On Yangzijiang
Credit Suisse said it is maintaining its ‘Outperform’ recommendation on Yangzijiang Shipbuilding, while also revising up its 2012 earnings estimates.
It raised its target price from S$1.30 to S$1.60, which is right in the centre of a wide range of target prices by analysts. The lowest is $1.04 set by DMG & Partners, which has a 'sell' call.
Credit Suisse, however, has a decidedly more optimistic view on the shipbuilder: "Yangzijiang is one of the cheapest stocks in the sector with 2012 P/E of 6x, significantly below companies such as Cosco Corp (17x) and the sector average (11x).”
The analysts had met with management after the FY11 results.
"We expect the stock to be re-rated as it develops further as an integrated marine services provider and concerns about financial investments fade,” Credit-Suisse said.
“We expect contracts for two jackup rigs worth up to US$400 mln to be awarded in 2012. We believe the key overhang on Yangzijiang’s share price is its Rmb10.5 bln investment in held-to-maturity financial products,” Credit Suisse said.
The brokerage added that it expects investments to decline to Rmb5.5 bln by end 2014, due to working capital requirements and capex for two new yards.