DBS Group Research analyst Ho Pei Hwa has kept her “buy” recommendation on Yangzijiang Shipbuilding with a higher target price of $1.70 from $1.40 previously.
The new target price of $1.70 is based on an FY2023 P/B of 1.7x, which implies an FY2023 P/E of 11x, says Ho.
While the group’s share price has nearly doubled in a year, Ho notes the group’s shares could “re-rate further” towards her target multiples. This is as the group delivers strong earnings growth, makes headway into the liquefied natural gas (LNG) carrier market and makes advances in environmental, social and governance (ESG) improvement, she writes.
Yangzijiang is stepping up its ESG initiatives, with the introduction of its two carbon strategy. The first, Green Factory, aims to reduce carbon footprint in its shipyards, while the second strategy, Green Vessels, targets to build more clean energy vessels.
“In fact, Yangzijiang has seen notable progress with [an estimated] 40% of orderbook coming from clean energy vessels. An ESG committee, comprising senior management and external advisors, has been set up to build a more structured ESG management system,” Ho writes.
The group's record high order backlog will also help to boost the group’s earnings visibility through 2025, she adds.
See also: Test debug host entity
“Yangzijiang’s yards are full through 2025 with an orderbook of [over] US$10 billion ($13.70 billion). This is expected to propel an earnings compound annual growth rate (CAGR) of 19% in the next three years, driven by both revenue growth and margin expansion, as 80% of its orderbook is made up of containership orders that command higher value and margins,” she writes. “We expect further uplift in its orderbook, boosted by potential orders for large LNG carriers.”
At present, Ho deems Yangzijiang’s share price as “undemanding”.
“The stock remains undemanding, trading at 1.4x FY2023 P/BV and 9x FY2023 PE against a project 16.6% return on equity (ROE) in FY2023, and three-year core earnings per share (EPS) CAGR of 19%,” she says.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
In her view, the market has overlooked the group’s earnings growth potential, as well as the structural uptrend of shipbuilding demand, and its ESG transformation into clean vessel space.
That said, key risks include the group’s revenue being denominated mainly in US dollars (USD).
“Assuming the net exposure of [around] 50% is unhedged, every 1% depreciation in the USD (against the RMB) could lead to a 1.5% decline in earnings. Every 1% rise in steel cost, which accounts for [around] 20% of cost of goods sold (COGS), could result in a 0.8% drop in earnings,” says Ho.
As at 1.07pm, shares in Yangzijiang Shipbuilding are trading 2 cents lower or 1.48% down at $1.33.
