Valuation Case Study on Nam Cheong. Ltd
Transcript of Valuation Case Study on Nam Cheong. Ltd
Valuation Case Study on
Nam Cheong. Ltd
Disclaimer and Declaration
The objective of the presentation is for educational
purposes. The full content of the presentation is for
illustration purposes only and should not be used as
investment recommendations. AB Maximus and its
presenters are not responsible for all investment activities
conducted by the participants and cannot be held liable
for any investment loss.
The company and presenters may have personal interest
in the particular shares presented.
Agenda
Company Background 1
Industry Overview 2
Valuation 3
Risk 4
Company Background
Nam Cheong Ltd is the biggest builder in
Malaysia of offshore support vessels (OSVs)
used in offshore oil and gas exploration and
production. It operates a shipyard in Miri,
Malaysia, and builds the majority of its vessels
in low-cost China with sub-contractor yards.
Company Background
Source: Company’s Annual Report 2012
Core businesses
Building OSVs: Nam Cheong delivers between 13 to 20 OSVs a year.
These include Anchor Handling Tug Supply (AHTS) vessels, Platform
Supply Vessels (PSVs), and Accommodation Work Barges (AWBs).
Chartering SSVs: Nam Cheong owns and operates a fleet of 7
Standby Support Vessels (SSVs), 2 Landing Crafts and 1 AHTS.
All 10 vessels are currently chartered out servicing oil platforms in
Malaysia and Brunei, with the AHTS in the Middle East.
Company Background
Source: Company’s Annual Report 2012
AHTS
PSV
SSV
Company Background
Revenue by Segment (FY 2012)
Source: Company Annual Report 2012
Shipbuilding is the main
Revenue contributor
839.01, 96%
37.56, 4%
Ship Building
Vessel Chartering
Company Background
Revenue by Geography (FY 2011)
Mainly in Asia Pacific Region
Source: Company’s Annual Report 2012
625.17, 71%
129.76, 15%
76.87, 9% 44.37, 5%
Asia Pacific
Africa
Europe
North America
Company Background
More than 50% market share of OSV in Malaysia
44 years of ship building experience and 25 years
in OSV building
Strong relationships with customers like Bumi
Armada, Perdana Petroleum and other
international offshore providers (i.e. Petrovietnam,
Tidewater and Vroon)
Build-to-stock model, building vessels ahead of
firm’s orders, can charge higher premium for
getting a vessel quickly.
Source: Company’s Annual Report 2012
Effective outsourcing strategy
outsources the construction of lower specification
vessels to its third party yards in China.
Nam Cheong to scale up its production capability
quickly without incurring additional capital
expenditures and take advantage of lower labour
costs in China.
Source: Company Annual Statement 2012
Industry Overview
Petronas RM 300b Capex
In 2011, Petronas announced that it will invest
RM300b in capital expenditure over the next five
years to upgrade asset integrity, enhance yield of
existing assets and drive its growth.
Nam Cheong likely to be biggest benefactor
Source: AM Frasers Research
Industry Overview
Industry Overview
Source: AM Frasers Research
Industry Overview
Source: BP Statistical review 2011
Industry Overview
Source: Petronas
CEO Datuk Shamsul Azhar Abbas
Group plans to reduce the dividend by RM2b to RM28b in order to
“preserve cash for reinvestment for future growth”.
Industry Overview
Malaysia to boost revenue by increasing capex
plan by 20% for Petronas
55 new shallow-water offshore vessels, visible
demand for Nam Cheong: Enhanced Oil
Recovery projects, which form RM97.5b (71%) of
the RM137.5b in current projects.
AHTS vessels are the workhorses of the offshore
oil & gas scene, AHTS (of the 10k-12k bhp
variety) and PSVs (up to 4,000 dwt), which Nam
Cheong also builds, will be in greater demand. Source: AM Frasers Research
Industry Overview
Petronas News
Source: AM Frasers Research
Industry Overview
Source: Pareto Company
Recent News
Placement of 19,000,000 new ordinary shares
Source: SGX Announcement
Valuation
Methodology
Discounted Cashflow
P/E Comparison
* Project the future cash flow from recognition of revenue
model based on vessels delivery
Valuation
Risk Free Rate 3.0%
Market Required Return 10.0%
Beta 1.08
Cost of Equity (CAPM) 13.81%
Cost of Debt 10%
WACC 12.14%
Risk Premium for Terminal Value
Return 3%
Small Cap Risk Premium 3%
Profit / FCFF projection
Valuation
DCF Model FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E
Free Cash Flow
EBIT 125 101 139 214 247 285
Effective Tax Rate 4.21% 8.03% 1.45% 15.00% 15.00% 15.00%
NOPAT 119 93 137 182 210 243
Less Net Working Capital 67 (48) (63) (67) (78) (87)
Less Capex (11) (7) (18) (46) (53) (55)
Add Depreciation and
Appreciation 6 6 7 6 6 6
Free Cash Flow 181 45 62 75 85 107
Valuation
Valuation FY2012E FY2013E FY2015E
Terminal
Value
Discounted FCF 64.91 73.83 92.52 663.04
Present Value of Cash Flow 60 86 105
Sum of Present Value 914
Terminal Value 0
Total Enterprise Value 914 210
Add Net Cash 0
Less Borrowing 0
Equity Value as at 31/12/2012 914
No of Outstanding Shares 2,103
Price per Share $0.35
…
Valuation
Final Valuation
Fair Value per share $0.35
Current market vale per share
(19 July 2013) $0.27
Valuation (P/E Comparison)
Company P/E
Nam Cheong 9.89
Vard Holding 8.47
Ezion 14.15
Ezra 13.29
Dyna Mac 13.5
Swiber 5.8
ASL Marine 6.89
Average P/E 10.28
Est. Forward EPS for Nam Cheong 0.086
Fair Value of Nam Cheong using P/E $0.88
Source: Bloomberg
Trading Data
52 Weeks Trading Range $0.18 - $0.30
Avg Volume (3 mths) 1 mil
Market Cap $567.85 mil
Source: Bloomberg Website
Trading Data
Source: Bloomberg Website
Main Risks
Build-to-stock model requires more cash front
and may involves more leverage, uncertain
sales means Nam Cheong are more vulnerable
to world economic problems due to their
inventories.
Outsourcing risk, majority of their vessels are
outsourced to China although there were no
serious issues over the past few years
Main Risks
Future competition from Chinese OSV builders.
Default Risk - Low
Current ratio = 2.77
Interest coverage = 17.46
D/E ratio = 0.75
Loans maturing this year = NA
Cash = 216 mil