Investment spin-off on track
- FY21 beat expectations on forex gains and good operational performance; declared 5 Scts final dividend, or 3.6% yield
- Shipbuilding gross margins to expand from low of ~11% in 2H21
- Investment spin-off progressing well; SGX approval on listing possible by mid-Mar
- Reiterate BUY; TP lifted to S$2.15
Investment Thesis:
A prime proxy to shipbuilding and shipping upcycles. After record-high order wins of US$7.4bn in FY21 (48% higher than US$5bn in the last boom in 2007), Yangzijiang’s yards are full through 2024. While order momentum should slow down, it is expected to stay at an elevated level of ~US$2.5bn per annum. Earnings are set to grow at a two-year CAGR of 13%, backed by a US$8.5bn record orderbook with gross margin improvement set towards 20% (from 11% in 2H21).
Catalysts driving share price closer to our TP include: i) optimism on the macro economy and shipping market; ii) sequential earnings growth, underpinned by revenue and margin expansion; iii) a potential increase in the dividend payout; and iv) an improving ESG score – comprising a potential spin-off of the investment arm and gaining traction in the dual fuel and LNG carrier markets.
Valuation:
Our TP has been lifted to S$2.15 after rolling over valuation to FY2022, based on a sum-of-the-parts valuation (SOP), pegged to an 8x PE on shipbuilding earnings, 0.7x P/BV for investments, and 1.0x P/BV for its marked-down bulk carrier/tanker fleets. This translates to a 1.09x P/BV (0.5SD above its five-year mean of 0.9x).
The stock is unwarrantedly undervalued, trading at a 0.7x P/BV and 7x PE against a 10% ROE and two-year core EPS CAGR of 13%.
Where we differ:
Market has over-penalised Yangzijiang for its debt investments, most of which are backed by collateral of 1.5-2.5x.
Key Risks to Our View:
Revenue is denominated mainly in US dollars. Assuming the net exposure of ~50% is unhedged, every 1% depreciation in the USD 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.