for clients in Nam Cheong
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 NCL's 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 2016's pipeline more manageable.
* Recommendation: We will retain NCL's issuer profile at Neutral for now, though we are eyeing NCL's cash burn closely for improvements. Bond rating wise, we are downgrading NCLSP'17s to Neutral, while keeping NCLSP'18s and NCLSP'19s at Overweight and Neutral respectively on valuation.
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