Felicia Tan Published on Thu, Aug 12, 2021
Analysts from CGS-CIMB Research and DBS Group Research have reiterated “add” and “buy” on Mainboard-listed Yangzijiang after the group reported 39% y-o-y higher earnings of RMB1.6 billion ($335.1 million) for the 1HFY2021 ended June on Aug 5.
The results surpassed the expectations of both brokerages.
CGS-CIMB analyst Lim Siew Khee has maintained her target price of $1.91 in an Aug 6 report after increasing her estimate from $1.63 in a previous report dated Aug 2.
Despite the group’s better-than-expected results, which was helped by other gains, Lim says she expected more gains from the sale of vessels.
“There are 23 vessels left in its fleet which could be put up for sale in the quarters ahead, in our view,” she writes.
The group also announced that it was conducting a preliminary strategic review of its debt investment portfolio, which Lim sees as a “major catalyst” for the group.
The spin-off, if confirmed, would alleviate investors’ concerns over “shady banking”.
“However, one has to also stomach the potential loss of recurring income of interest from debt investment ([around] 50% of its gross profit). 2QFY2021 debt investments balance grew to RMB16.6 billion (from RMB14.8 billion in 1QFY2021), with interest income down 14% q-o-q to RMB417 million,” she notes.
That said, a sharp decline in containership freight rates may pose as a downside risk to the counter.
DBS analyst Ho Pei Hwa has increased his target price to $1.95 from $1.80 previously as he deems Yangzijiang as “undervalued”.
The new target price is based on sum-of-the-parts (SOTP) pegged to 10 times price-to-earnings (P/E) on FY2021 shipbuilding earnings, 0.8 times price-to-book value (P/BV) for investments and 1.0 times P/BV for its marked-down bulk carrier/tanker fleets.
This translates to 1.08 times P/BV (0.5 standard deviation or s.d. above its five-year mean of 0.9 times), he says.
The counter is also the best proxy for the recent wave of activities for containerships that marks the beginning of a new supercycle since 2007.
The next wave of orders is expected to come from bulk carriers in 2HFY2021, followed by tankers in 2022, he says.
The higher target price comes in tandem with raised order win estimates to US$7.5 billion ($10.19 billion) for the FY2021, representing a compound annual growth rate (CAGR) of 20%.
Ho also projects Yangzijiang’s distributions per share (DPS) to rise to 5.0 cents to 6.5 cents (representing a yield of 3.5% to 4.5%) in line with the earnings growth.
“While its share price has risen some 50% year-to-date (y-t-d), the stock remains undervalued at 0.8 times P/BV, relative to historical upcycle and peer valuations,” he writes in an Aug 6 report.
Catalysts to drive the group’s share price closer to Ho’s target price estimate includes optimism on the macro economy and shipping market, buoyant contract flows and improving pricing power, sequential earnings growth, a potential increase in dividend payout, as well as an improving environmental, social and governance (ESG) score.
To Ho, the market “has over-penalised Yangzijiang for its debt investments, most of which are backed by collateral of 1.5-2.5x times”, although investors should be cautious of a depreciation in USD, as the group’s revenue is denominated in mainly USD.
“Assuming the net exposure of 50% is unhedged, every 1% USD depreciation could lead to a 1.5% decline in earnings. Every 1% rise in steel cost, which accounts for about 20% of cost of goods sold (COGS), could result in a 0.8% drop in earnings,” he writes.
Meanwhile, the research team at OCBC Investment Research has recommended “hold” on Yangzijiang with a higher fair value of $1.64 from $1.45, on the back of improving prospects in the shipbuilding market.
“[Yangzijiang] has performed better than many other Chinese shipbuilders during the downturn and now stands to benefit in a recovering shipbuilding industry,” writes the team in an Aug 10 report.
“The investment side of the business is a significant part of the company, and we value this segment at a discount to listed Chinese banks,” it adds.
As at 3.30pm, shares in Yangzijiang are trading 1 cent lower or 0.7% down at $1.48, or 0.8 times P/B with a dividend yield of 3.6% for the FY2021, according to DBS’s estimates