Nam Cheong

Nam Cheong: CIMB initiates coverage with O/p Call and $0.35 TP. House note that by turnover, Nam Cheong is Msia’s largest OSV builder. The group has over 20 years of track record in building OSVs and has delivered over 80 vessels since 2007. Using Chinese yards to support its build-to-stock business model, Nam Cheong has achieved a 3-year average gross margin of 19% vs. Singapore peers’ 9%. In terms of ROE, it achieved a 3-year average of 30% vs. Singapore peers’ 7%. Although build-to-stock is not unique to Nam Cheong in Msia, the company stands out with its close relationships with Malaysian OSV owners. Malaysia’s Petronas has budgeted RM300b (US$100b) in E&P spend over 2012-17, up 70% from the previous five years, to arrest a production decline and boost reserves. Initiatives such as marginal and deepwater field developments as well as enhanced oil recovery mean more work for the Malaysian OSV sector. Given the improving OSV market, Nam Cheong has launched its most ambitious newbuild programme to date, which should propel earnings growth. Although its share price surged 96% in 2012, Nam Cheong trades at 6x CY14 P/E on a 3-year EPS CAGR of 15%. SG OSV builders are trading at 7x on flat earnings. Also, cross-sectional P/B to ROE regression analysis shows that the stock is relatively undervalued.