Analysts from Citi Research and UOB Kay Hian have kept “buy” on Mainboard-listed Yangzijiang Holdings after the shipping group announced its plans to spin-off its investment business for its separate listing on Nov 29.
See: Yangzijiang plans to spin off investment business for separate listing
Citi analyst Jame Osman has given the group a target price of $1.80 based on a sum of the parts (SOTP) valuation methodology to reflect Yangzijiang’s diversified business.
“Debt investments currently account for about 30% of the group’s total assets. We have accorded a 13 times price-to-earnings ratio (P/E) multiple, a slight discount to +1 standard deviation historical mean, to Yangzijiang’s shipyard operations given lower expected earnings volatility going forward as the shipping industry recovers,” Osman writes in a Nov 29 report.
“[The valuation] also [takes] into account that: we expect the group to remain profitable, with respectable return on equities (ROEs) (in excess of its peers); and to recognize significant strides the group has made in market share gains,” he continues. “We value the group’s debt investments at 0.5 times book, a slight discount to trading valuations of Chinese banks (0.7 times) taking into account Yangzijiang’s less developed credit controls when compared to banks.”
On Nov 29, Yangzijiang announced that the spin-off might be completed over the next six to 12 months although there’s no absolute certainty this restructuring will go ahead and be completed.
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The investments business is primarily involved in microfinancing, debt investments at amortised cost and other investments.
Citi’s Osman also notes that the business has been steadily contributing to the group’s income and provides flexibility in terms of “access to financing / working capital and funds for corporate action (mergers and acquisitions, buybacks)”.
“That said, we believe investors have accorded a steep valuation discount to the segment due to perceived lack of transparency, among other factors. A successful exercise could see a meaningful unlocking of value for shareholders – we currently value the segment at 0.5 times price-to-book (P/B) in our SOTP of $1.80 per share; whereas a spin-off at book value could see up to 40 cents per share (22%) upside to our SOTP,” he writes.
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While no further significant details were disclosed beyond the targeted timeline, Osman expects that Yangzijiang would not retain a stake in the listed debt investment entity.
Instead, “proceeds could be distributed to existing Yangzijiang shareholders in the form of shares in the newly listed entity rather than a potential special dividend,” he says. “This will better enable founder Ren Yuan Lin (who holds a 25.4% stake in Yangzijiang) to retain his ownership of the listed entity as well.”
“We believe the listing of the debt business would also drive a potential re-rating on the basis of better earnings quality and attract investors seeking more direct exposure to the company’s quality core shipbuilding business,” Osman adds.
To this end, Osman says he believes the group remains “undervalued even discounting a potential listing of its debt business, and offers a best-in-class valuation-to-ROE proposition vs regional peers”.
UOB Kay Hian analyst Adrian Loh has also maintained his target price on Yangzijiang at $2.
“At our target price, the company would trade at a P/B of 1 times which we believe is fair. Yangzijiang remains inexpensive, after correcting about 13.9% in 2HFY2021 to date vs the Straits Times Index (STI) which has increased 1.8% over the same period,” writes Loh in a Nov 30 report.
“We note however, that Yangzijiang’s Korean shipbuilding peers have fared even worse, with Samsung Heavy and Daewoo Shipbuilding down 15.7% and 19.3% respectively over the same period,” he adds.
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The move to spin off its investments business into a separate entity is a “positive” one, according to Loh, as it should remove some of the discounts that Yangzijiang’s investors had “arguably placed on the company given the size of this non-core business”.
That said, the analyst expressed his disappointment that the announcement did not offer more concrete information such as the potential valuation parameters and,or valuation ranges.
“However, given the cross-border nature of this transaction, the tax implications for the major shareholders will likely be the main issue to contend with. Furthermore, there will also be the requisite approvals needed from various regulatory authorities as well as the board of directors and shareholders,” notes Loh.
Furthermore, the statement should not come as a surprise to the market given that the group’s management had previously stated that it was undertaking a strategic review of its debt investments business, he adds.
“With separate listed companies containing the shipbuilding business and the debt investments business, Yangzijiang will look to deliver sharper operational focus, enable more targeted capital allocation, and have more strategic and financial flexibility to pursue its own growth opportunities,” he says.
For the time being, Loh has kept his earnings estimates on the group unchanged.
“We continue to believe that the stock remains inexpensive as it is trading at very low 2022 multiples of 5.8 times P/E and 0.6 times P/B. We highlight that end-1HFY2021 potential net cash per share (ie net cash plus debt investments) is 81 cents which equates to 62% of the company’s share price,” he says.
“We also highlight that the company has spent over $24 million in share buybacks in November alone which, in our view, underlines management’s belief that its business prospects are bright, and specifically that its lower-than-expected 3QFY2021 profit margins should head higher over the next few quarters.”
As at 12.27pm, shares in Yangzijiang are trading 1 cent lower or 0.78% down at $1.28, or an FY2021 P/B of 0.7 times and dividend yield of 5.4%, according to UOB Kay Hian’s estimates.
