Yangzijiang Shipbuilding’s “better than expected” earnings for FY2021 ended Dec 31 2021 has pushed UOBKayHian (UOBKH) analyst Adrian Loh to maintain his “buy” call on the counter, at a revised target price of $1.95.
This is down 5 cents from his previous $2.00 call, but is expected to give the counter a 41.4% upside from its $1.38 price, Loh writes in a Mar 1 note.
His lower target price follows a small downgrade of 2% in his Earnings Per Share (EPS) forecast for 2022 due to anticipations of a margin compression in the shipbuilding segment in 1HFY2022.
“We use a target P/E (price-to-earnings) multiple of 9.3x (1 standard deviation above Yangzijiang’s five-year average) which is applied to our 2022 EPS estimate,” explains Loh.
At his target price, the counter would be trading at a price-to-book (P/B) of 0.9x, “which we believe is fair,” he mulls.
Loh notes that the stock remains inexpensive as it is trading at “2022 multiples of 6.2x P/E, 2.6x EV/EBITDA and 0.6x P/B”. He adds that Yangzijiang’s net cash per share of 43 cents as at end 2021 equates to 31% of its current share price.
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The shipbuilder’s revenue and PATMI (profit after taxes minus interests) “exceeded expectations” by coming in at RMB17 billion ($3.7 billion) (+13% y-o-y) and RMB3.7 billion (+47% y-o-y) respectively.
The bottom line was helped by forex (foreign exchange) hedging gains, reversals of impairments and higher interest income.
However, the company’s shipbuilding margins fell h-o-h to 10.8% in 2HFY2021 from 13.5% in 13.5% in 1HFY2021 due to progressive construction of ships with lower margins, higher steel prices and a stronger RMB vs USD.
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For reference, the shipbuilder had delivered 50 vessels in 2021 (up from 45 vessels in 2020), of which 27 was in 2HFY2021.
The company is looking to enjoy a growth in its earnings, thanks to a target delivery of 60 ships this year. This will come alongside shipbuilding margins of 13% to 15%, notes Loh.
“Yangzijiang’s management guided for margins to remain in the low teens in 1HFY22 and once its low margin-contracts are completed, its margins should trend higher in 2HFY22,” the analyst says.
This comes as steel plate prices have stabilised at RMB6,000/tonne, below the peak of around RMB7,000/tonne. While the management is not expecting material price increases this year, Loh says that its shipbuilding contracts – which were struck when steel prices were around RMB6,500 – 7,000/tonne – are expected to be more profitable.
Meanwhile, the shipping business is expected to continue performing strongly in 1HFY2022 given its young fleet with an average age of eight years. The gleet has a relatively low carrying value of RMB2.18 billion or only US$18 million per vessel.
Back in 2021, Yangzijiang’s fleet of 26 vessels generated 40% gross margin, on the back of a 32% increase in revenue. The company had also sold two vessels and recognised a gain of RMB70 million in FY2021.
Looking ahead, the shipbuilder is seemingly on track to spin-off its investment business onto the mainboard. The company is targeting a valuation of RMB20 billion for this business, which was at its book value as at end 2021.
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Yangzijiang’s upcoming plans for this segment include transferring “25% of its total assets of RMB20 billion out of China to Singapore and acquire a Capital Markets Services license for wealth and investment management, with the ultimate aim of managing its own as well as third party funds,” says Loh.
“Although 80% of its investments are currently in debt and private equity, Yangzijiang plans to reposition the portfolio by going up the risk curve into private debt, credit and equities, as well as public credit and equities, and plans to invest around 40% of its portfolio outside China,” he adds.
Shares in Yangzijiang Shipbuilding closed up 2 cents or 1.43% at $1.42 on Mar 9.
Cover image: Yangzijiang Shipbuilding
