Yangzijiang Shipbuilding's series of new contracts has lifted its orderbook to a record, prompting analysts to suggest that there's room for earnings upgrade.
According to the shipbuilder's announcement on June 26, it has won US$5.6 billion in new contracts year to date, including US$4.4 billion within 2Q.
This brings its order book to a record US$14.6 billion, and, as described by DBS, "mind-blowing".
Among the new contracts won include those from major liners such as Maersk and AP Moeller, and include maiden orders for vessels designed to run on more sustainable fuel, such as methanol – part of the wider trend of going green.
In a report on June 27, DBS believes that the order wins should “rejuvenate” the company’s “muted” performance of its share price, which is trading at an “unwarrantedly” low valuation of 8.5x FY23 PE and 1.35x PB, which is below the industry average of 1.6x PB. This is so even with superior financials of 16% earnings CAGR, ROE of 17-18%, and 4-5% dividend yield.
With the contract wins, the company's yards will be kept busy through 2027, providing over 4 years of revenue visibility.
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"We surmise that the likelihood of them expanding current capacity and expediting delivery are increasing with the huge order intakes in 2Q.
"In addition, we could also expect further yard efficiency and productivity gain. These could prompt the street to upgrade earnings for next 2-years especially if margins surprise on the upside in the upcoming 1H23 results," adds DBS, who now has a "buy" call and $1.70 target price, which is based on 1.7x FY2023 price to book, and 10.8x price to earnings.
On the other hand, there's "cost risk" from unfavourable forex, and steel, potentially impacting margins. In any case, citing market prices compiled by Clarksons, the contract prices fetched by Yangzijiang seems "quite in line" with the peers.
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"We believe reasonable buffers have been built in to mitigate cost inflationary risks," says DBS.
CGS-CIMB’s Lim Siew Khee, meanwhile, has kept her “add” call and $1.66 target price on the stock, which is based on 1.7x price to book.
“We believe decarbonisation and green financing availability could spur more dual-fuel ships orders in the near term,” notes Lim, who expects the share price to have “positive” reaction from the news.
Yangzijiang Shipbuilding traded as high as $1.45 on June 27, up 7.41%.
