CGS-CIMB Research analysts Lim Siew Khee and Izabella Tan have kept an “add” rating on Yangzijiang Shipbuilding with a lowered target price of $1.63 from $2.41.
To the analysts, Yangzijiang’s strength now lies on its strong shipbuilding execution, attractive valuations of 6x CY2023 P/E, and potential higher dividend payout.
Tan and Lim see comfortable room for higher dividend, and estimate the dividend payout of Yangzijiang’s historical shipbuilding to be in the range of 23%-35% or 1.65 cents-2.63 cents.
“We adjust our valuation model for Yangzijiang, now based on a ‘carve-out’ model which excludes its debt securities entity Yangzijiang Financial Holding (YZJFH),” say the analysts.
Tan and Lim also estimate a free cash flow (FCF) of RMB940 million ($193 million) and net cash of RMB4.9 billion by end-FY2022 ending December, which implies that a comfortable higher dividend payout of 39%, or RMB0.24 or 5 cents, is possible to the analysts.
The analysts estimate that given its strong order book of US$8.5 billion as at Feb and healthy cash conversion cycle of 30 days, Yangzijiang should generate a FCF of RMB1 billion and RMB 2.7 billion in FY2022 and FY2023.
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“Yangzijiang could still end FY2022 with RMB 9 billion cash even with a 50% dividend payout,” say Lim and Tan. “We have factored in a sustainable 40% payout for FY2023 or dividend per share (DPS) of RMB0.3, backed by net cash of RMB 6.4 billion in FY2023.”
This comes at the point where average steel spot prices in China have risen 8% YTD, according to the CDSPHRAV Index.
“Although steel cost constitutes a sizeable portion of approximately 20% of shipbuilding costs, we believe Yangzijiang has factored these costs into its contract negotiations,” say Lim and Tan.
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Yangzijiang secured US$7.41 billion worth of contracts in FY2021, recording a higher average contract value in 2HFY2022 of approximately US$10,400 than 1HFY2021 of around US$7,500, a rise of approximately 40%.
This could have captured the approximate 10% rise in average steel prices in 2HFY2021 to around RMB5,744 per tonne as compared to around RMB5,219 per tonne in 1HFY2021. Some of its contracts clinched in FY2021 were based on steel costs assumption of RMB6,000-RMB7,000 per tonne.
The analysts observe that most of the orders secured in FY2021 are scheduled for delivery in FY2023-FY2024, which means steel procurement could start in 2HFY2022. “We have factored in the gross profit margin (GPM) of 12.5%, 16.5%, 18% for FY2022, FY2023, FY2024 respectively, with the GPM averaging 19% in FY2014-FY2020,” write Lim and Tan.
In light of Yangzijiang’s earnings visibility through to FY2024, Yangzijiang is heavily discounted to the analysts, as the stock is trading 5.5x PE for the calendar year of 2023 and 0.96x PB for the calendar year of 2022. This is with the context of the most recent merger in the sector– between Keppel and Sembcorp Marine on April 27.
Yangzijiang is also cheaper than the Korean yards which trade at approximately 1.4x CY2022 P/B with relatively patchy margin records, Lim and Tan observe, with gross loss positions in FY2021 and GPMs mostly below 10% of pre-Covid-19 levels.
As at 12.21pm, shares in Yangzijiang are trading at 2 cents up or 2.25% higher at 91 cents at a FY2022 P/B ratio of 0.96x and dividend yield 5.75%.
