The tide appears to be turning for Yangzijiang Shipbuilding, after its MSCI rebalancing in early November set it by 5 - 39% behind his peers, observes DBS analyst Ho Pei Hwa.
Following this, the counter has been left out in the recent equity rally and rotational interests into cyclicals to position for an economic recovery that came after news on the progress of the Covid-19 vaccine development.
Instead, Yangzijiang’s share price dipped by 1%. This was an underperformance of 17% against the straits times index and up to 39% vis-à-vis regional shipyards.
SEE:Yangzijiang wins new orders for nine vessels worth US$226 mil
“[The] market has over-penalised Yangzijiang for its debt investments, [without] realising that most investments are backed by collateral of 1.5-2.5x,” Ho says in a Dec 4 note.
The way she sees it, the shipbuilder’s rebalancing has brought a “golden opportunity” as it is now trading at below cash of $1.15/per share and an “unjustifiably low” 0.5x price to book value.
Looking ahead, Ho reckons the counter could have a 1.5% decline in earnings for every 1% depreciation in the US dollar if its net exposure of around 50% is not hedged.
She adds that a 1% increase in the cost of steel – which accounts for approximately 20% of its cost of goods sold – could potentially see a 0.8% drop in earnings..
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Even so, Ho has maintained her “buy” call and $1.40 target price on Yangzijiang. She believes this gives the counter a 54% upside from its 91 cent price on Dec 3.
Shares of Yangzijiang were flat at 91 cents as at 12.30pm on Dec 4.
