SINGAPORE (June 6): CGS-CIMB Securities is upgrading its recommendation on Yangzijiang Shipbuilding to “add” from “hold” with a target price of $1.27.
This came despite the fact that the group is the second-worst performer on the Straits Times Index, after Starhub.
In a Tuesday report, analyst Lim Siew Khee says, “We think its share price has pessimistically priced in a sharper drop in orders and margin erosion.”
Although the group is still winning shipbuilding orders and delivering profits, its current valuation of 0.6 times CY18 book value prices in its yard’s inability to secure orders at a profit, says Lim.
On Monday, the group announced that it has secured nine new shipbuilding orders in May totalling US$578 million ($773.3 million), bringing the total value of orders to-date for 2018 to US$846 million.
See: Yangzijiang secures 9 contracts in May totalling $773 mil
The new orders should help the group yield about 9% gross margin, based on its assumptions of USD/RMB of 6.16 and steel costs of RMB 4,700-4,800 per tonne.
“These are 4-6% more conservative than the current USD/RMB rate of 6.40 and steel cost of RMB4,400/tonne and hence we see room for write-back of provisions, bringing margins to low teens on execution. We have penned in shipbuilding-related gross margins of about 10% for FY18-20F. 1Q18 gross margin was 12%,” says Lim.
The group’s new orders include two 82,000 dwt dry bulkers, two 208,000 dwt dry bulkers and five 12,000 TEU containerships, which are scheduled for deliveries in 2020 and 2021.
This brings the average vessel price to US$64 million, which surpasses orders in 1Q18 of US$268 million for nine vessels at an average of US$30 million per vessel.
“We note that the bulk carrier newbuild index has risen around 14% since 2016, on the back of higher steel and materials costs,” adds Lim.
Meanwhile, the analyst predicts that if the group’s order momentum remains strong in 2H18, its order win for the year could beat its own guidance and CIMB-CGS’s forecast of US$1.8 billion.
Lim also believes that the stable Baltic Dry Index and rising newbuild prices could spur healthy orders in the bulk sector.
Furthermore, given the rising interest rate environment, the group is expected to renew most of its low-risk investments at higher rates of up to 14%. Its new portfolio in 2018 has been yielding 12-14% returns.
“We think investors could start to warm up to YZJ’s business model which include HTM assets to weather downturns in shipbuilding. It is also more valued (stronger profits, balance sheet and dividend yield) than Singapore yards,” says Lim.
As at 10.52am, shares in Yangzijiang are trading at $1.02 or 0.64 times FY19 book with a dividend yield of 4.16%.
