UOB Kay Hian is keeping its “buy” recommendation on Yangzijiang Shipbuilding (YZJ) with a target price of $1.17, while keeping the stock as one of its top picks for 2021, on the back of the resumption of earnings growth, undemanding valuations and strong financial position.
According to analyst Adrian Loh in a Jan 4 report, YZJ remains a compelling stock for 2021 as its valuations remain undemanding, with 2021 EV/EBITDA and price-to-book (P/B) multiples of 2.6 times and 0.52 times respectively, a price-to-earnings (P/E) growth ratio of 0.69 and net cash of 22 cents/share (or 23% of its current share price).
“In addition, if we add its net cash position to the current portion of its debt investments of RMB13.6 billion as at end-3QFY2020, this would be equivalent to its current market capitalisation of $3.5 billion. This implies that investors are essentially getting its shipbuilding business for free,” adds Loh.
Meanwhile, YZJ has outperformed expectations with US$1.8 billion ($2.4 billion) worth of new orders in 2020, despite the Covid-19 pandemic. Importantly, the company appears to have expanded its market share in China given that almost all of its orders in 2020 were from Chinese clients compared to the past which saw a more even distribution of orders originating from clients in Europe, US and Asia.
“We expect the company to build on this momentum in 2021 and conservatively forecast a similar level of order wins of US$1.8 billion. We also highlight commentary from management that global new shipbuilding orders declined by about 50% in 9MFY2020 in the face of a depressed market, which makes the company’s order wins this year all the more compelling,” says Loh.
On the outlook, the analyst is expecting a solid 4QFY2020 for YZJ, given that the company’s new order wins peaked during the quarter at nearly US$1 billion.
“While we forecast a 25.2% y-o-y decline in FY2020 net profit, we do not expect dividends to be negatively impacted, unlike other companies in the same sector or even in sectors which traditionally have been viewed as “safe”,” says Loh.
In 2019, YZJ paid a final dividend of 4.5 cents per share and the company is forecasted to pay a similar dividend this year, which equates to a FY2021 yield of 4.9% at the current share price.
In addition, results may be bolstered by the potential of a tax write-back at the end of 2020 as its new shipyard may qualify as a “New High Tech Enterprise”, thus attracting a lower tax rate of 15%, compared to the current 25% tax rate that YZJ has provisioned for. This would equate to a tax write-back of around RMB100 million which Loh has yet to factor into the current forecasts.
As at 11.12am, shares in YZJ are trading at 97 cents or 0.5 time FY2020 book with a dividend yield of 4.4%.
