Nam Cheong: Eyes Lucrative Indonesian Charter Market
(BUY, SGD0.28, TP: SGD0.38)
NCL said it has entered into a JV with PT Bahtera Niaga Internasional to own and operate OSVs in the lucrative Indonesian market. This will boost its high-margin recurring charter income, thus providing a new source of orders and shipbuilding profits. NCL remains one of our Top Picks in the O&G sector, which we have upgraded to OVERWEIGHT. Maintain BUY, with a higher SGD0.38 TP.
Sailing into lucrative Indonesian offshore supply vessel (OSV) charter market. The JV will allow NCL to charter vessels in Indonesia, where the enforcement of cabotage law has led to charter rates spiking up 33% last year. We calculate that a 5,150bhp anchor handling tug supply (AHTS) vessel in Indonesia today can fetch net margins of 41% net margins. At 30% equity financing, the ROE on each vessel is 44%.
Assuming three new 5,150bhp AHTS per year. As capital is the main constraint for Indonesian partners of OSV JVs, we are assuming that this JV will own the smaller 5,150bhp AHTS vessels as well as a low growth rate of three vessels per year starting from FY14F, relative to NCL’s large building capability.
More shipbuilding orders on the horizon. NCL will be able to recognise 51% of each AHTS vessel’s shipbuilding revenue and 49% of the charter profit at the associate-income level. We understand that the shipbuilding programme does not include these vessels. As such, we add three vessels per year to our S-curve revenue recognition model.
NCL can deliver 34%/19%/15% growth. With these additions, we raise FY13-15F estimates by 1.7%/5.1%/3.2%. Further upside is possible as NCL has not yet to unveil its FY15F shipbuilding programme, which would boost FY14F/FY15F shipbuilding revenue if the numbers exceed our 25-vessel assumption (including vessels not intended for charter).
Industry leader with low valuations; BUY. With commercial shipbuilding orders recovering, the pressure on offshore O&G asset prices should be somewhat relieved. We continue to like NC’s low valuation and lead as the world’s largest OSV builder. Following the EPS upgrades, our TP is nudged up to SGD0.38.
Publish date: 20/09/13