Excerpts from analyst's reports
OCBC analyst: Low Pei Han (left)
Yangzijiang Shipbuilding: In line 3Q14 results
Yangzijiang Shipbuilding (YZJ) reported a 2% YoY rise in revenue to RMB3.7b and a 1% fall in net profit to RMB811.2m in 3Q14, in line with expectations. Excluding a one-off tax credit of RMB349m in 2Q14, 9M14 core net profit accounted for 77% of our full year estimate.
The group delivered eight vessels in 3Q14, and its order book stands at 114 vessels worth a total of US$4.6b. According to China Association of The National Shipbuilding Industry (CANSI), new ship prices remain subdued as the shipbuilding market is still facing challenging conditions.
Pending a meeting with management, we maintain our HOLD rating but put our fair value estimate of S$1.24 under review.
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Kim Heng Offshore & Marine: Fair value 23 cents, 24% upside
Kim Heng Offshore & Marine reported a 23% YoY fall in revenue to S$13.8m and a 62% fall in net profit to S$1.2m in 3Q14, such that 9M14 net profit accounted for only 37% and 36% of ours and the street’s full year estimate.3Q14 continues to be slow
It was expected that 2H14 would be a stronger period due to delays in arrivals of drilling rigs and offshore support vessels from customers in 2Q14, but given the industry slowdown, work flow was not as forthcoming as expected earlier.
In particular, there were seven rigs that did not arrive on time in 3Q14 for work, though four of them are currently in Kim Heng’s yard (~S$10-15m in revenue). Two jobs from Korea (~S$10m in revenue) also did not come as expected.
More rigs may be warm-stacked in the coming quarters
Currently, there are about 20 idle rigs in or nearby Singapore, and about 15 in Labuan. Out of the 20 warm-stacked rigs, Kim Heng is currently servicing most of them, and we estimate gross margins of about 30-35% for such jobs. Looking ahead, management believes that more rigs may be coming to Singapore to be warm or cold stacked, presenting more business opportunities.
Meanwhile the group is also exploring the possibility of buying old rigs, refurbishing them and selling for a profit. According to management, the group has had experience undertaking such jobs a few years ago.
De-rating of broader sector, but still keen to reward shareholders
Currently, the group has an order book of about S$80m vs. S$86m in Jul 2014, but with the recent de-rating of the broader sector, we lower our P/E from 10.5 to 10x for Kim Heng, and also cut our FY14F and FY15F earnings estimates by 33% and 23% respectively with the weaker-than-expected results and a slowdown in industry activities. Based on 10x FY15F earnings, this lowers our fair value estimate to S$0.23.
But given the upside potential of about 24%, we maintain our BUY rating on the stock. Meanwhile, management is still keen to reward shareholders with a final dividend for the year.
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