DBS Vickers: Bullish on YANGZIJIANG, sceptical about COSCO's profitability

Excerpts from DBS Vickers' report

Analyst: Ho Pei Hwa (left)

•        Keppel reported a decent 1Q performance and we expect SMM to be on track 
•        Yangzijiang could beat market expectations while Cosco struggles to keep its head above water 
•        Top picks are Keppel and Yangzijiang 

Keppel reported last Wednesday a decent set of 1Q results that saw its O&M profits growing 11% y-o-y with a healthy operating margin of 14.2% (excluding a one-off disposal gain). Our expectations for the other three rigbuilders/shipbuiders are as follows:

Yangzijiang: We are more bullish than the street and believe that Yangzijiang could deliver a net profit growth of 9% y-o-y to Rmb780m in 1Q14, aided by a 10-ppt reduction in tax rate following the accreditation of high-tech status for its new yard in March.

This represents 26%/33% of our/consensus estimates for FY14. We think that peers may have underestimated its shipbuilding margins. 

We will likely raise our forecasts further post-results, adjusting for the tax rate and fine-tuning other assumptions.

Yangzijiang has 6 yards strategically located along the Yangtze River. Photo: annual report

Sembcorp Marine: We expect its 1Q net profit to grow 10% y-o-y to S$130m, driven by higher orderbook recognition. Operating margin is sustainable at around 11%, bolstered by higher contribution from more profitable repair business and own proprietary designs.

Barring unforeseen circumstances, SMM should see a stronger 2H, with growing repair revenue and profit recognition of the prudent margin projects that are due for delivery by end 2014/early 2015. Key downside risk is the hiccups at its Brazil yard.

Cosco: We have relatively low visibility on Cosco. The group is barely breaking even with its net margin dipping to 0.5% in 4Q13. The market is hopeful to see an earnings recovery for Cosco this year after its massive provisions in FY13, hinging on an improved shipping market. We project net profit to recover from S$4.6m in 4Q13 to S$8m in 1Q14.

Cosco stands to benefit from China’s growing demand for offshore structures, though we remain sceptical about its profitability.

Our top picks are Keppel and Yangzijiang. Keppel’s Near Market, Near Customer strategy is paying off handsomely and its recent partnership with a Chinese yard paves the way for Keppel to tap the booming O&G activities in China.

Yangzijiang, the prime beneficiary of a shipping and shipbuilding recovery, is undervalued at 1.0x P/BV, despite its 17% ROE and 4.5% dividend yield. 

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