SINGAPORE (July 3): DBS is reiterating its “buy” call on Yangzijiang Shipbuilding (YZJ) with an unchanged target price of $1.82, which translates to 1.25 times price-to-book value (P/BV), approximately 0.4 standard deviation points below the historical mean of 2 times since listing.
This comes on the belief that the counter’s share price is set to stage a rebound after falling 50% YTD due to overblown concerns on foreign exchange (forex) and steel costs as well as a global trade war.
In a Tuesday report, analyst Ho Pei Hwa says the plunge in YZJ’s share price presents a “window of opportunity to buy [into a] quality shipyard at a rock bottom valuation” of 0.6 times P/BV, which is at a 30% discount to global peers’ average P/BV of 0.9 times at its last traded price of 88.5 cents.
This is not withstanding the counter’s attractive 5% yield and higher ROE of 8-9% versus peers’ 4-5%, says the analyst, who also believes the recent strengthening of the USD will benefit YZJ with every 10 RMB cents leading to a RMB300 million ($61.4 million) writeback.
“We have been more bullish on the sector’s recovery and believe Yangzijiang deserves to re-rate, catalysed by order wins and newbuild price increases eventually. The shipping demand growth could outstrip supply growth in 2018-2019,” says Ho.
Going forward, the analyst believes the group is well-positioned to ride any sector consolidation and shipbuilding recovery ahead given its status as the largest and most cost-efficient private shipbuilder in China.
“Better returns from the investment segment provides a cushion to its recurring income stream… Its strategy to move up into the LNG/LPG vessel segment with a Japanese partner strengthens the longer-term prospects of the company,” comments Ho on YZJ’s management and operations.
Nonetheless, DBS is remaining cautious on the possibility of the USD’s depreciation as well as steel cost hikes.
“Revenue is denominated mainly in USD, and only half is naturally hedged. If the net exposure is unhedged, every 1% USD depreciation could lead to a 2% decline in earnings. Every 1% rise in steel costs, which accounts for about 20% of COGS, could result in 0.8% drop in earnings,” says Ho.
As at 3:59pm, shares in YZJ are trading 0.6% higher at 89 cents or 0.6 times FY18F book.
