Analysts with UOB Kay Hian and DBS Group Research have raised their respective target prices for Yangzijiang Shipbuilding following better-than-expected FY2023 earnings.
For the 12 months ended Dec 2023, the China-based shipbuilder reported earnings of RMB4.1 billion, up 57% y-o-y.
The company was able to improve its net margins by 4.4 percentage points to 22%; and generated an ROE of 19.6%.
The company has declared a dividend of 6.5 cents, up from 5 cents paid for FY2022.
Yangzijiang's management is guiding that it can maintain its margins into the current FY2024, where it is targeting some US$4.5 billion worth of new contracts, a significant jump from its historical guidance.
More tellingly, it expects this level of new orders to run into FY2025.
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As of end of February, Yangzijiang has already won US$1.35 billion, or 30%, of its FY2024 target, bringing its total order book to US$14.5 billion.
In his March 1 note, Adrian Loh of UOB Kay Hian has estimated an FY2024 orderbook win target of US$5 billion which is higher than the company’s own target of US$4.5 billion.
He has raised earnings estimates for FY2024 by 16% and for FT2025 by 13% respectively, as he projected higher gross margins of 18% for both years, up from 16% and 15% respectively previously.
See also: Macquarie revises Singapore earnings growth for FY2024 to 7% from 3%
Loh acknowledges that the gross margins for the shipbuilding business is at least 2-4ppt below the company’s guidance, but he prefers to "err on the side of caution for now and upgrade earnings at a later stage".
To reflect his higher earnings projections, Loh has raised his target price from $1.92 to $2.19, which is pegged to a target PE multiple of 9.4x, which is 1.5sd above the company’s five-year average of 6.3x.
Loh believes that this valuation premium is justified given the company’s earnings visibility into 2027 as well as its strong track record of safe and efficient shipbuilding for its international customer base.
Ho Pei Hwa of DBS Group Research has also raised her target price while keeping her "buy" call.
In her Feb 29 note, she projects the company to enjoy an earnings CAGR of 10% in the next two years, driven by both revenue growth and margin expansion, as over 70% of its order book is made up of containership orders that command higher value and margins.
"We expect further uplift in its order book, boosted by potential orders for large LNG carriers," says Ho, whose new target price of $2.10, up from $1.90, is based on 1.8x FY2024 book value and 10.2x implied PE.
Ho estimates that 60% of the re-rating could come from earnings growth and 40% from an uplift in the valuation multiple from 8x towards 10x PE, on the back of more LNG carrier orders; and ESG improvement.
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Lim Siew Khee of CGS International is similarly upbeat.
She maintains her liking for this counter for the company's upside from margin expansion, sustained annual order wins of US$4 billion to US$5 billion on decarbonisation commitments from liners to renew fleets and decent yield of 4-5%.
Furthermore, fluctuating freight rates due to unexpected disruption in routes could see faster absorption of newbuild supply, says Lim.
In addition, Yangzijiang has maintained a predictable track record of better operating margins, of 19% in FY2023 for example, versus the mere single-digit margins that its Singapore and Korean peers could eke out.
For Lim, key risks include a sharp rise in steel costs affecting margins, order cancellations and a steep decline in freight rates impacting new orders.
She believes that the dividend for FY2024 will be lifted further to 7 cents.
Her target price of $1.96, unchanged, is based on 2x FY2024 book value, which is 40% above Yangzijiang's peers and which is justified on the back of its better margin profile and order executing track record.
