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


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


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.


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


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


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

Valuation Case Study on Nam Cheong. Ltd

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