SINGAPORE (March 2): DBS is maintaining its “buy” on Yangzijiang Shipbuilding with a target price of $1.12 as it expects China’s largest and most cost-efficient private shipbuilder to ride the coming shipping recovery.
(See also: Yangzijiang reports FY16 earnings of $368 mil)
As it is, the global orderbook-to-fleet ratio has dropped to a low of 11%, of which about 60% is scheduled for delivery in 2017, implying that supply will be much lower from 2018 onwards. Meanwhile, the new Ballast Water Management Convention rule should take effect in Sept 2017 and could accelerate the demolition of old vessels.
This is expected to drive the recovery in the shipping market, led by dry bulk segment, and thus give a boost to newbuild demand.
“We expect new orders to almost double to US$1.5 billion ($2.1 billion) this year, from 2016’s US$823 million,” says analyst Ho Pei Hwa in a Thursday report.
According to Ho, Yangzijiang’s core shipbuilding revenue is backed by its healthy order backlog of US$4.3 billion as at end Dec 2016, which translates to revenue coverage of more than two times.
Yangzijiang also has a solid balance sheet and sits on net cash of 65 cents per share, representing 53% of NTA while valuation is undemanding at 0.8x P/B, against 7-8% ROE and 4% yield.
“We value Yangzijiang based on sum-of-parts (SOP) methodology to better reflect the valuations of the various segments. We arrive at a target price of $1.12, after applying 10x FY17F price earnings (PE) on shipbuilding earnings, 1.0x price-to-book value (P/B) for bulk carriers and 1x P/B for investments,” says the analyst.
Shares of Yangzijiang are up 3 cents at $1.02.
