The current oil and gas downturn has created some noteworthy buying opportunities for investors. We review one of these hidden gems: Nam Cheong.
Words by Calvin Yeo
The world has too much oil production at the moment.
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Oil prices fell to a six-year low on Monday as US and OPEC countries continue to maintain oil production levels. (Someone really needs to scale back in the face of collapsing prices, but OPEC, led by Saudi Arabia, the world’s largest exporter of crude oil, has refused to make cuts in an effort to squeeze American shale producers.)
A barrel of crude oil now costs below US$45 per barrel, a far cry from over US$100 just last year.
While we have no way of knowing when oil prices will eventually recover, we do know that the best investing opportunities are found in times of crisis.
Going by the advice of Warren Buffet, “Be fearful when others are greedy, and greedy when others are fearful”, this may be a good time to hunt for hidden gems amongst unfavoured stocks.
Nam Cheong – The Low-Cost OSV Builder
Nam Cheong, a Malaysia-based offshore marine company, was once a darling of the Singapore stock market, with its name dropped consistently at investment events.
The company experienced a great run-up when its share price went from about S$0.135 in 2012 to as high as S$0.495 in 2014 – close to a 5-times return.
However, it has taken a beating ever since weak oil prices hit the offshore and marine sector. These days, Nam Cheong’s share price hovers at around S$0.30, pretty much hitting a one-year low.
Attractive Margins and High Returns on Equity
Nam Cheong’s core business is in building oil support vessels (OSV) for use in oil drilling operations. Its approach to shipbuilding is unique and somewhat unorthodox: instead of building a vessel after orders are received from customers, it builds new vessels first and then stores them as inventory for potential customers.
Compared to other OSV builders, Nam Cheong commands very attractive profit margins due to its low-cost standardisation as well as build-ahead-of-delivery strategies.
This is evident in its profitable 15 to 16% net margins. The return on equity (ROE) is also very attractive at over 25%.
In difficult times like these, low-cost builders like Nam Cheong are far more valuable to clients than premium builders such as Vard.
Valuations for Nam Cheong are very inexpensive compared to a year ago.
Back then, the company was trading at S$0.32, but the price-to-earnings ratio (P/E ratio) was more than 8 times and the dividend yield was about 3.1%.
Today, at a similar price of around S$0.30, the P/E ratio is 6 times and the dividend yield exceeds 4.5%.
Analysts have forward figures of FY2015 at an even more compelling valuation of 5 times forward P/E ratio.
Apart from Nam Cheong, which other stocks do you think are worth buying now? Let us know in the comments box below.