Following a spate of new order wins, UOB Kay Hian's Adrian Loh has kept his "buy" call on Yangzijiang Shipbuilding, but with a revised target price of $1.65, up from $1.58 previously.
"With revenue visibility now out to 2027, our bullish thesis on the company remains intact and we believe the company is well placed to win more orders for delivery between 2026-27," writes Loh in his June 28 note.
On June 26, the China-based shipbuilder announced new orders of some US$5.6 billion year to date, bringing its total order book to a record US$14.6 billion.
The orders were from customers including leading shipping lines Maersk and AP Moeller, and for vessels running on cleaner fuel, as the industry joins the sustainability movement.
Loh expects the company to secure further orders and lift the year-to-date number to at least US$7 billion when it announces its half-year earnings in mid to late August.
With the higher-than-expected new orders, Loh has upgraded his earnings estimate by between 1 and 7% for FY2023 to FY2025.
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"While the year-to-date order wins have been impressively large, construction only commences in 2HFY24 at the earliest, since deliveries are largely between 2025-27, and thus the positive impact on revenue and profit will start in 2024," explains Loh.
With the earnings visibility, Loh expects the company to potentially pay higher dividends, which will help the company address one of the ongoing perceived issues of capital management.
As at end of FY2022 ended Dec 2022, the company had the equivalent of 31 cents per share in cash, but chose to maintain its dividend at just 5 cents per share - the same as the preceding year.
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According to Loh, Yangzijiang's management had stated it will look to change its dividend policy from a flat payout to one tied to a stated percentage of the earnings.
Loh's current assumption is for a payout of 4.5 cents per share, equal to a payout ratio of 25%. If the ratio is lifted to 40%, that would lift the dividend to 7 cents.
"In our view, this is a positive move as a payout ratio is more flexible, aligns the interests of shareholders and management, and provides greater stability in dividend payments over time as it adjusts to changes in earnings," states Loh.
Loh's revised target price of $1.65 is based on 8.7x earnings, which is 1 standard deviation above the company's past five-year average of 6.5x.
Loh adds that at current levels, Yangzijiang Shipbuilding is not an expensive stock. Even at the target price level of $1.65, that is 1.2x FY2023 price to book - a level last seen in 2012.
As at 11.22am, Yangzijiang shares changed hands at $1.45, unchanged for the day. it is the third most actively traded counter thus far today.
