Nam Cheong to inject S$47m in shipbuilding projects

A move that might bring 23% return on average equity.

According to OCBC, Nam Cheong has proposed to issue 190m new ordinary shares at S$0.255 per share. If successful, its ordinary share capital will be enlarged by about 10%.

After deducting fees, the net proceeds of S$47m will be used for shipbuilding projects and vessel chartering business and refinancing existing borrowings and other general corporate purposes.

Here's more from OCBC:

We note that the proposed placement comes right after its recent MTN issuance. In Nov 2012, Nam Cheong issued S$110m of notes for general corporate purposes. Together with the MTN issuance, the group would have raised close to S$160m.

We believe this is mainly to fund a rapid expansion in its FY14F shipbuilding programme. Demand for offshore vessels is expected to be robust over the medium term horizon driven by Petronas’ massive RM300b capital expenditure programme.

Yet, shareholders should also worry about the dilution of their interests post-placement. Unlike debt, equity is a very expensive form of capital and therefore demands a higher rate-of-return.

Assuming a rapid expansion of its shipbuilding and vessel chartering business, Nam Cheong’s return on average equity (ROAE) would increase to around 23% for FY13-14F, compared to 22% for FY11-12F.

Its EPS – after adjusting for the placement shares – is expected to grow by about 20% CAGR, and may provide the catalyst to re-rate from the current 8x fwd PER.

All considered, there is still plenty of upside for shareholders despite the 10% dilution in their interest. We adjusted our model to incorporate the proposed placement but prefer to keep our BUY rating and S$0.30 FV unchanged ahead of its FY12F results next month.