SINGAPORE (Apr 30): Analysts agree Yangzijiang Shipbuilding’s results for the 1Q18 ended March were largely in line with expectations. But there is less agreement over where the stock is headed.
According to Bloomberg data, YZJ has five “buy” calls, four “hold” calls, and one “sell” call among analysts.
A 6-percentage-point drop in gross profit margin for YZJ’s core shipbuilding business to 17% for the 1Q18 ended March saw its earnings for the quarter fall 11% to RMB 595.1 million ($124.8 million).
See: Yangzijiang Shipbuilding sees 1Q earnings fall 11% to $124.8 mil on lower margins & other losses
Meanwhile, its share price has tumbled some 28% from a 2018 high of $1.64 on Jan 19.
“Value is emerging as the stock trades at undemanding valuation of 0.8x P/BV, against 9% ROE and 4% yield,” says DBS Group Research analyst Ho Pei Hwa in a Monday report.
As the largest and most cost-efficient private shipbuilder in China, Ho believes YZJ is well positioned to ride the anticipated shipping and shipbuilding recovery.
“Core shipbuilding revenue was backed by its healthy order backlog of US$4.5 billion as at end-March 2018, which translates into revenue coverage of more than 2x,” says Ho. “The drop (in shipbuilding margins) could be mitigated by a lower tax rate, recognition of old yard relocation fees, and write-back/disposal gains from terminated vessels.”
In addition, Ho adds that investment return would provide a cushion to YZJ’s recurring income stream.
DBS is reiterating its “buy call” on YZJ with an unchanged target price of $1.82 – representing an upside of more than 54% from its current share price of $1.18 as at 3.59pm.
Meanwhile, CIMB Research is keeping is “hold” call on YZJ and slashing its target price to $1.27, from $1.51 previously.
Analyst Lim Siew Khee attributes the lower price target to lower order momentum for shipbuilding and continued margin pressure.
However, Lim notes that 1Q18 investment held to maturity (HTM) stood at close to RMB 12 billion with investment income of RMB 301 million, up 45% y-o-y.
According to Lim, YZJ’s new portfolio has been yielding 12-14% returns, while its management is confident of hiking the rates of low-risk investment that are due for renewal in 1H18 to close to 12%.
“This would bridge the gap in shipbuilding margin pressure in 2H18, sustaining profitability and dividend payout,” says Lim, adding that “appetite in YZJ may diminish in near term as profits may be driven by investment income instead.”
However, she adds that CIMB is keeping its “hold” recommendation as YZJ is more valued, with stronger profits, balance sheet, and dividend yield, than Singapore yards.
According to CIMB valuations, shares of YZJ are trading at an estimated price-to-earnings ratio of 8.4 times and a dividend yield of 3.8% for FY18.
