Brokers' take: DBS says Yangzijiang 'unwarrantedly undervalued', reiterates 'buy'

DBS Group Research on Friday (Nov 5) reiterated "buy" on Yangzijiang Shipbuilding BS6 . It added that recent share price weakness presents a buying opportunity.

The research team's target price of S$1.95 implies a potential upside of about 48.9 per cent, based on the shipbuilder's share price of S$1.31 as at the midday trading break on Friday. The counter was down 1.5 per cent or S$0.02 at the time.

Mainboard-listed Yangzijiang on Nov 1 posted a 20.8 per cent drop in its third-quarter gross profit despite a 25 per cent rise in revenue as higher raw material costs squeezed shipbuilding margins. The counter tumbled as much as 7.1 per cent or S$0.05 to S$1.30 at the start of trading the next day.

DBS analyst Ho Pei Hwa said in a report on Nov 5 that the stock is "unwarrantedly undervalued" and has yet to fully reflect the current shipbuilding cycle. There is also a potential upside to Yangzijiang's current dividend yield of 4 per cent, with room to raise payout.

Ho said that Yangzijiang is trading at 0.7 times its book value and 8 times the research team's estimated earnings. Yet the company has a return on equity of 10 per cent and a three-year earnings per share compound annual growth rate of 18 per cent.

Yangzijiang is also the best proxy to the newbuild supercycle - which refers to a sustained period of expansion. The group has seen record-high order wins of US$7.4 billion in the year to date, with its yards full through 2024.

"While order momentum should slow down, it is expected to stay at elevated levels of US$2.5 billion to US$3 billion per annum," Ho said.

Moreover, the bulk of its newbuild contracts obtained this year have also factored in higher steel costs. With steel prices cooling off, management expects a further 10-20 per cent correction next year, which will boost margins.