Asia Credit Research

Nam Cheong Ltd: Credit Update

Wednesday, 16 September 2015
Trough or worse?

2Q2015 Performance: 2Q2015 revenue was weak, generating the worst

quarterly revenue since 3Q2012. Revenue declined 49.1% y/y to
MYR192.7mn, with Shipbuilding revenue falling 49.6% y/y or 42.3% q/q.
This was driven by lower progressive revenue recognition from PSV
sales (MYR94.4mn in 2Q2015 versus MYR228.5mn in 2Q2014).
Negative product mix (more BTO versus BTS) squeezed Shipbuilding
gross margins (fell 2ppt y/y to 15%). Coupled with sharply lower revenue,
gross profit fell 54.3% to just MYR30.6mn. With SG&A at MYR25.8mn flat
relative to 1Q2015, this drove EBIT lower to MYR4.8mn. It is worth noting
that net profit of MYR10.5mn was boosted by MYR10.9mn fair value gain
on derivatives as well as weighed down by MYR7.4mn exchange loss.

Order Book: The outstanding order book remains fair at MYR1.5bn with
deliveries through 2016, declining from MYR1.6bn (end-1Q2015). This is
roughly ~80% of FY2014 total revenue. Though we recognize that the
environment is tricky for offshore marine vessel builders such as NCL,
the order book offers some buffer while NCLs competitive niche in the
Malaysian market should help the firm manage the challenging period.

Cash Burn Concerns: Operating cash flow worsened from -MYR61.2mn

(end-1Q2015) to MYR279.5mn (end-2Q2015). The biggest driver was
inventory increasing by MYR171.4mn (with NCL taking delivery of BTS
vessels), as well as amounts due from clients (for WIP) increasing by
MYR222.7mn. NCL has already chased receivables / delayed payables
to generate MYR80mn in cash but this is non-recurring. Furthermore,
NCL paid out MYR84.9mn in dividends during the period. To meet these
cash needs, net borrowings increased by MYR88.7mn while cash fell by
291.5mn. NCL had 571.1mn in cash at end-2Q2015, and raised a further
SGD75mn (~MYR225mn) in bonds late July. With ~MYR800mn in cash,
NCL should be able to meet its SGD110mn bond maturity on 07/11/15.

Leverage: EBITDA pressure drove net debt / EBITDA higher from 1.7x
(end-2014) to 8.9x (end-1H2015). The deterioration in net gearing was
more muted but still troubling, increasing from 45% (end-1Q2015) to 83%
(end-2Q2015). NCL will need to pursue payments due from clients to
bring down its gearing levels, and to consider selling the BTS ships in its
inventory at prices that may pressure its gross margins. That said, we
expect the bulk of committed vessel deliveries (for BTS vessels) to be in
2015, with 2016s pipeline more manageable.

Recommendation: We will retain NCLs issuer profile at Neutral for

now, though we are eyeing NCLs cash burn closely for improvements.
Bond rating wise, we are downgrading NCLSP17s to Neutral, while
keeping NCLSP18s and NCLSP19s at Overweight and Neutral
respectively on valuation.

Treasury Advisory
Corporate FX & Structured
Products
Tel: 6349-1888 / 1881
Interest Rate Derivatives
Tel: 6349-1899
Investments & Structured
Products
Tel: 6349-1886
GT Institutional Sales
Tel: 6349-1810

OCBC Credit Research

Nick Wong Liang Mian, CFA
+65 6530-7348
NickWong@ocbc.com

Treasury Research & Strategy

Nam Cheong Ltd

Figure 1: Revenue breakdown by operations 2Q2015

Table 1: Summary financials

Year ended 31st December

FY2013

FY2014

1H2015

Revenue

1,257.4

1,928.6

518.9

EBITDA

211.9

306.6

57.7

EBIT

198.9

289.0

48.3

Income statement (MYR mn)

Gross interest expense

33.6

53.5

34.7

Profit Before Tax

199.2

303.3

51.4

Net profit

205.6

301.8

49.8

362.0

800.1

571.1

Total assets

2,179.2

3,252.4

3,443.4

Gross debt

851.2

1,309.3

1,601.1

Net debt

489.1

509.2

1,030.0

Shareholders' equity

938.6

1,219.3

1,238.3

Total capitalization

1,789.8

2,528.7

2,839.4

Net capitalization

1,427.8

1,728.6

2,268.3

Balance Sheet (MYR'mn)

Cash and bank deposits

Source: Company

Cash Flow (MYR'mn)

Funds from operations (FFO)

218.7

319.5

59.2

CFO

-200.0

114.4

-340.6

Capex

44.0

6.1

1.1

Acquisitions

-0.2

-117.4

0.0

Disposals

7.3

148.3

0.1

Dividends

-25.9

-54.7

-84.9

Free Cash Flow (FCF)

-244.1

108.3

-341.7

Adjusted FCF*

-262.9

84.5

-426.5

EBITDA margin (%)

16.9

15.9

11.1

Net margin (%)

16.4

15.6

9.6

Gross debt/EBITDA (x)

4.0

4.3

13.9

Figure 2: Gross profit breakdown by business line 2Q2015

Key Ratios

Net debt/EBITDA (x)

2.3

1.7

8.9

Gross debt/equity (x)

0.91

1.07

1.29

Net debt/equity (x)

0.52

0.42

0.83

Gross debt/total capitalization (%)

47.6

51.8

56.4

Net debt/net capitalization (%)

34.3

29.5

45.4

Cash/current borrowings (x)

1.50

1.44

0.70

EBITDA/gross interest (x)

6.3

5.7

1.7

Source: Company

Source: Company, OCBC estimates

*Adjusted FCF = FCF Acquisitions Dividends + Disposals

Figure 3: Debt maturity profile

Figure 4: Net gearing

As at
30/06/2015

% of debt

Secured

504.4

32%

Unsecured

310.4

19%

Amounts in MYR mn
Amount repayable
One year or less, or on demand

After one year

Secured

19.4

1%

Unsecured

766.9

48%

1,601.1

100.0%

Total
Source: Company

Treasury Research & Strategy

Source: Company, OCBC estimates

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