Target Price: SGD0.62
Shipyard Losses Mar Credible Performance
Jaya’s 1QFY14 results were flat q-o-q, with net income at USD7.6m. We remain concerned over the persistent losses incurred by its shipyards, as we expect these to widen as more vessels are delivered, thus leaving more yard space empty. While the stock is inexpensive, other O&G companies offer stronger growth at lower valuations. Maintain NEUTRAL, with a SGD0.62 TP.
• Core earnings in line but stock looks pricey on core earnings. Jaya’s net income of USD7.6m (19% of our FY14F estimate) was exactly what we calculated for its 4QFY13 core earnings. It sacrificed potential earnings growth by selling Jaya Pioneer and Jaya Scout from its fleet, which produced a USD20m one-off gain in 4QFY13. The stock is trading at a 14x core P/E (ex-gains from vessel sales) on annualised 1Q14 results, and this P/E rises if Jaya does not maintain its 91% utilisation.
• Shipyard losses widen. While Jaya’s shipbuilding unit lost USD5.5m in FY13, its 1QFY14 loss already came to USD2.6m. As it has no third-party contracts in hand, amid a shrinking building programme for its own fleet, its two shipyards are under-utilised. Each vessel delivered into its fleet leaves more empty space at its shipyard, while additional non-capitalised overheads widen its shipyard losses. These persistent shipyard losses eroded its potential net income by 25% in 1QFY14.
• Performance has peaked. Jaya’s fleet utilisation of 91% is commendable, but this also implies that there his limited upside to its earnings growth until more vessels are injected into its fleet, short of asset purchases. The next charter vessels are scheduled to be delivered in March and April 2014. Meanwhile, the upcoming monsoon season will have a somewhat negative impact on utilisation and profitability.
• Better picks out there. Jaya’s share price rose 5-10% on news of a strategic review. We see underutilisation at its yards as an impediment to a potential sale, although most of the company’s fleet assets are likely to be readily marketable. For exposure to the offshore support vessel segment, we prefer Nam Cheong (NCL SP, BUY, TP: SGD0.39), with its 34% growth at a 8x P/E vs Jaya’s less certain growth at >10x P/E. Maintain NEUTRAL, with SGD0.62 TP.
Publish date: 04/11/13