Brokers' Take: OCBC raises fair value for YZJ, DBS reviews target price

FOLLOWING Yangzijiang Shipbuilding's (YZJ) release of its strong earnings result for the first quarter of the year, OCBC is raising the shipbuilder's fair value to S$1.45 from S$1.18. DBS Group Research is currently reviewing its target price of S$1.50.

On Thursday, YZJ announced that it had recorded an 89 per cent increase in net profit in Q1 2021 - to 761.7 million yuan (S$156.1 million) from 403.8 million yuan in the corresponding period of the year before.

This came amid a decline in its topline, as the group's revenue fell 25 per cent year on year from 3.50 billion yuan in Q1 FY20 to 2.62 billion yuan in Q1 FY21.

Given that YZJ was able to secure orders for 54 vessels worth US$1.8 billion, OCBC analysts said in a Friday report that this brought the company's outstanding order book to US$6.6 billion, which should "provide a stable revenue stream for at least the next two years".

OCBC maintained the sentiment that order-win momentum has been encouraging, as demand and orders placed for container ships surged on the back of a global container shortage and multi-year high spot container freight rates.

Its raising of YZJ's fair value from S$1.18 to S$1.45 is based on "improving prospects" in the ship-building market, but it said it would monitor the group's financing business as well as the level of competition from rival yards.

The research group cited potential privatisation offers, faster-than-expected upturn in the ship-building market and accretive acquisitions in the region at reasonable valuation multiples as potential catalysts.

On the other hand, OCBC noted investment risks to be macroeconomic deterioration, a downturn in the ship-building market, order cancellations and deferments and asset impairments relating to the investment segment.

Meanwhile, the net profit exceeded DBS' expectation of a 650 million yuan (S$135.3 million) profit. DBS analysts noted that the out-performance comes from a reversal of impairment loss on financial assets amounting to 156 million yuan.

Although the spike in steel cost since 2020 could impose some pressure on shipyards' margins in the next two quarters as the company worked on "older and lower priced projects", DBS analysts said that the situation should improve as shipyards commence work on the recently secured contracts that "factored in higher material cost".

Further, the analysts said that there should be a mitigating effect from "firmer USD", which tumbled and resulted in over 700 million yuan forex loss last year.

With "whopping year-to-date wins of US$4.01 billion, Yangzijiang looks set to break its record of US$5 billion in new orders secured during the supercycle in 2007," DBS analysts said.

The research group raises revenue coverage to 2.5 years, and estimates that YZJ's order book has grown from US$3.09 billion as at end-2020 to about US$6.6 billion in April 2021. This is near its peak of US$7 billion in 2007 and 2008.

DBS also noted the strong cash flow generation of the shipbuilder, with net cash per share raised to S$1.37, from S$1.14 a quarter ago. It is reviewing its current target price of S$1.50. The ex-dividend date of the shipbuilder's final dividend per share of 4.5 Singapore cents is May 20. The valuation remains "undemanding" at 0.8 times the price-to-book-value,, against a 9 per cent return on equity and a 4 per cent yield.

DBS estimates YZJ's book value per share for 2021 to be S$1.80.

At S$1.43, the market capitalisation of YZJ is S$5.5 billion, FY20 P/E is 9.4 times, P/B is 0.8 times, and dividend yield is 3.2 per cent. According to Bloomberg consensus, the average target price of YZJ is $1.41, representing a potential downside of 1.4 per cent.

As at 5.11 pm on Friday, YZJ's shares were trading 2.1 per cent or S$0.03 lower at S$1.43.