UOB Kay Hian analyst Adrian Loh has upgraded Yangzijiang Shipbuilding (YZJ) to “buy”, with an unchanged target price (TP) of $1.55.
In his report dated Jan 10, the analyst says that YZJ’s “stellar” share price performance since the demerger of its debt investments arm, Yangzijiang Financial, in April 2022 has led to recent profit-taking on the stock early in the year. Loh also sees YZJ potentially doubling its dividends for FY2022 ended December and a potential US$400 million ($532 million) new order win on the cards.
“Since YZJ demerged its debt investments arm in late-April 2022, its share price has risen by over 31% and easily outperformed the Straits Times Index’s (STI) -1.4% return over the same period. As a result, YZJ’s share price, like some of the other outperformers in 2022, suffered from profit-taking in the first few trading days of 2023,” he explains.
Loh says that the perceived loss of a large liquified natural gas (LNG) carrier order also added to the negative sentiment on the stock. “On Jan 2, industry sources indicated that one of China’s state-owned shipyards, China Merchants Industry Holdings, had won an order for four 180,000 cubic metre (cbm) LNG carriers from Celsius Tankers. As the market had been holding out hope that this could be awarded to YZJ, its perceived ‘loss’ of this large US$1.88 billion led to the stock being sold down.”
“However, after speaking to management, it appears that YZJ walked away from this large order as the margins were thinner than normal,” Loh explains. He says that YZJ had said at its 3QFY2022 results briefing that the company would selectively accept new orders for large LNG carriers as it sees some supply chain risk for equipment and raw materials, and backing away from this large order should not come as a “major surprise”.
As a result of the recent share price weakness, Loh now believes that YZJ’s risk-reward looks attractive with a nearly 30% upside to his unchanged TP of $1.55, which uses a target price-to-earnings ratio (P/E) of 9.0x to his 2023 earnings per share (EPS) forecast. Loh also notes that at his fair value of $1.55, YZJ would trade at a 2023 price-to-book ratio (P/B) of 1.3x.
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“Our target P/E multiple is 1 standard deviation (s.d.) above YZJ’s past five-year average of 6.7x which we view as fair given the company’s earnings growth in 2023, as well as the stability of its earnings due to its US$10.3 billion orderbook at present,” he says.
Loh has also upgraded his call on YZJ to “buy” as he sees YZJ possibly announcing higher-than-expected dividends when it releases its annual results at the end of February. Historically the company has paid a dividend of 4 to 5 cents per share, however the analyst points out that YZJ had around 19 cents per share of cash as at end-June 2022 and limited needs to fund either a debt investment arm, or growth and maintenance capex. “Assuming [YZJ] pays out half of its cash hoard, this would equate to a yield of 9.5%.”
Apart from the near-term dividend upside, the analyst maintains that YZJ’s valuations appear attractive. “Due to the recent decline in YZJ’s share price, we highlight that the stock is now trading at an attractive 2023 P/E and enterprise value-to-ebitda ratio (EV/ebitda) of 7.3x and 3.5x respectively,” he says.
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Meanwhile, the analyst says that YZJ is on its way to record its first order win of 2023, worth a potential US$400 million. “According to industry sources, Lepta Shipping of Japan has ordered four neo-Panamax container vessels from YZJ,” says Loh, who notes that the pricing for neo-Panamax vessels in the past two years has ranged between US$100 million to US$140 million per vessel.
Given that Lepta is an existing client of YZJ’s, having ordered 10 container vessels from the company in 2020, and is a joint venture (JV) between Nissen Kaiun and Mitsui & Co — the latter having strong ties with YZJ — Loh says it should be “no surprise” that YZJ was the preferred shipbuilder for Lepta.
He adds the caveat that he believes that YZJ has not publicly disclosed this order as it has yet to receive the first downpayment for this order.
Loh also highlights that YZJ is unlikely to announce any new order wins until at least mid- to late-February as a result of the Chinese Lunar New Year. “It should be noted that YZJ’s order wins in 2022 have easily exceeded expectations with nearly US$4.2 billion in new orders vs guidance of US$2 billion,” he says.
For 2023, the company has maintained its “standard” order-win expectation of US$2 billion with orders for tankers and bulk carriers rather than containerships, while LNG vessels will witness longer term growth, adds Loh.
Although YZJ’s subsidiary Yangzijiang Shipping received a winding-up application on Jan 8, this is expected to be a “non-event”, he says. The winding-up application originated from a dispute regarding a US$4.8 million profit from the sale of an oil tanker. “In the worst-case scenario, this level of provision amounts to less than 1% of our estimated 2022 earnings and thus is immaterial in our view.”
Loh’s share price catalysts for YZJ include the evidence of margin expansion from 2023 onwards and new orders in higher-margin shipbuilding segments, such as dual-fuel containerships, LPG tankers or large LNG carriers.
As at 11.10am, shares in YZJ were trading 1 cent or 0.82% up at $1.22, with a dividend yield of 4.07%.
