SHIPPING

SHIN YANG SHIPPING

(SHIN MK, SYSC.KL) 29 November 2010

Lower shipping volume dents 1QFY11

Company report BUY
Alex Goh (unchanged)
alexgoh@ambankgroup.com
+603 2036 2291 Rationale for report: Company Result

Price RM1.04 Investment Highlights

Fair Value RM1.25
52-week High/Low RM1.14/RM1.03
• We maintain our BUY call on Shin Yang Shipping Corp
Key Changes Bhd (SYSC) with a lower fair value of RM1.25/share (from
Fair value
RM1.38/share earlier) at a CY11F PE of 8x. This implies an
EPS
unchanged 20% discount to a lower SOP of RM1.56/share
and a 40% discount to the larger shipping peers’ 14x due
YE to Jun FY10 FY11F FY12F FY13F to its smaller market capitalisation.
Revenue (RMmil) 605.9 825.5 907.5 994.5
Core net profit (RMmil) 151.8 174.8 205.7 229.2
• SYSC’s 1QFY11 net profit of RM31mil came in below
EPS (Sen) 12.6 14.6 17.1 19.1 expectations, accounting for 15% of our FY11F net profit of
EPS growth (%) 35.3 15.2 17.7 11.5 RM192mil and street’s RM188mil. This stems from a
Consensus net profit (RMmil) 187.8 220.0 244.0 weaker-than-expected contribution from the shipping
DPS (Sen) 0.2 0.2 0.3 0.3 division, which accounted for 53% of 1QFY11 group pre-
PE (x) 8.2 7.1 6.1 5.4 tax profit vs 85% in 4QFY10.
EV/EBITDA (x) 6.0 5.1 4.4 3.7
Div yield (%) 0.2 0.2 0.2 0.2
ROE (%) 11.6 12.3 13.0 12.9
• Sequentially, SYSC’s 1QFY11 core net profit rose 32% to
Net Gearing (%) 16.5 17.2 11.6 5.4 RM31mil largely driven by a pre-tax rebound in the
shipbuilding division to RM15mil (+2.8x QoQ). This was
Stock and Financial Data partly offset by a 26% decline in shipping pre-tax profit due
to a lower timber volume to Japan-based traders who have
Shares Outstanding (million) 1,200.0 been adversely affected by the strong yen.
Market Cap (RMmil) 1,248.0
Book value (RM/share) 1.12
P/BV (x) 0.9
• We have lowered FY11F-FY13F earnings by 6%-9% due to:
ROE (%) 11.6
Net Gearing (%) 16.5 (1) Lower vessel utilisation rate of 90% from 93%
previously; and
Major Shareholders Datuk Ling Chiong Ho & family (74.5%)
(2) 1-ppt reduction in shipping gross margin to 31%.
Free Float (%) 25.0
Avg Daily Value (RMmil) 0.1
• We maintain our shipbuilding assumptions of an earnings
Price performance 3mth 6mth 12mth CAGR of 30% versus shipping’s 17% - lifted by the full
completion of Shipyard 2 yard that raises capacity by 1.7x
Absolute (%) -3.7 - - in FY11F as shipbuilding’s proportion to group earnings
Relative (%) -9.7 - - expand from 27% in FY08 to 30% in FY12F. The group’s
shipbuilding order book currently stands at RM310mil –
2.00 1,604 1.5x our FY11F shipbuilding revenue.

• While 1QFY11 results were slightly skewed by Japan’s

1.50 1,422 timber buying patterns, we expect volume shipments to
pick up given that Japan’s housing starts rose 18% YoY in
September this year.
Ind ex Po ints
(R M )

1.00 1,240

• We continue to view SYSC’s earnings as defensive given

its secured vessel utilisation from the Shin Yang group as
0.50 1,059
only 60% of its shipping needs are supplied by SYSC’s
fleet.
0.00 877
• SYSC is also a liquid proxy into Sarawak’s SCORE given
Ju n-10

that the company is a leading direct shipper in East

Shin FBM KLCI
Malaysia, accounting for 70% of shipping volume from
Port Klang to Miri.

• The stock currently trades at an attractive CY11F PE of

only 7x compared with 15x for the region’s shipping
PP12247/06/2011(029701)
operators.
Shin Yang Shipping Corporation 29 November 2010

DENTED BY LOWER SHIPPING VOLUME division, which accounted for 53% of 1QFY11 group pre-
tax profit vs 85% in 4QFY10.
 Maintain BUY at lower fair value

We maintain our BUY call on Shin Yang Shipping Corp

Bhd (SYSC) with a lower fair value of RM1.25/share (from
RM1.38/share earlier) at a CY11F PE of 8x. This implies
an unchanged 20% discount to a lower SOP of
RM1.56/share and a 40% discount to the larger shipping
peers’ 14x due to its smaller market capitalisation.
While 1QFY11 results were slightly skewed by Japan’s
timber buying patterns, we expect volume shipments to
pick up given that Japan’s housing starts rose 18% YoY in
September this year.
 Up 32% QoQ
Sequentially, SYSC’s 1QFY11 core net profit rose 32% to
RM31mil largely driven by a pre-tax rebound in the
shipbuilding division to RM15mil (+2.8x QoQ). This was
partly offset by a 26% decline in shipping pre-tax profit due
to a lower timber volume to Japan-based traders who have
been adversely affected by the strong yen.

The stock currently trades at an attractive CY11F PE of  Cut FY11F-FY13F by 6%-9%

only 7x compared with 15x for the region’s shipping
operators. We have lowered FY11F-FY13F earnings by 6%-9% due
to:

(1) Lower vessel utilisation rate of 90% from 93%

 Below expectations previously; and

SYSC’s 1QFY11 net profit of RM31mil came in below (2) 1-ppt reduction in shipping gross margin to 31%.
expectations, accounting for 15% of FY11F net profit of
RM192mil and street’s RM188mil. This stems from a But we maintain our shipbuilding assumptions of an
weaker-than-expected contribution from the shipping earnings CAGR of 30% versus shipping’s 17% - lifted by

TABLE 1 : RESULTS SUMMARY

FY 30 June (RMmil) 4QFY10 1QFY11 QoQ (%)
Revenue 137.2 154.1 12.3

EBIT 27.3 34.0 24.6

Unusual Items -
Associates & JVs 3.6 2.0 (43.8)
Finance cost (4.8) (5.0) 3.8
Pretax profit 26.1 31.1 19.0
Taxation (3.4) (1.0) (72.4)
Minorities 0.7 0.8 9.8
Net profit 23.3 30.9 32.2
Core net profit 23.3 30.9 32.2

EPS (sen) 9.1 10.3 12.7

Gross DPS (sen) 2.5 -
BV/Share (RM) 1.123 1.15 2.4

EBIT margin (%) 19.9 22.1

Pretax margin (%) 19.0 20.2
Effective tax rate (%) 13.2 3.1

FY 30 June (RMmil) 4QFY10 1QFY11 QoQ (%)

Shipping 113.8 111.6 (2.0)
Shipbuilding 23.4 42.5 81.7
Total revenue 137.2 154.1 12.3

Shipping 22.2 16.5 (25.7)

Shipbuilding 3.8 14.5 277.6
Total pre-tax 26.1 31.1 19.0
Source: Bursa Malaysia

AmResearch Sdn Bhd 2

Shin Yang Shipping Corporation 29 November 2010

the full completion of Shipyard 2 yard that raises capacity

by 1.7x in FY11F as shipbuilding’s proportion to group
earnings expand from 27% in FY08 to 30% in FY12F.

The group’s shipbuilding order book currently stands at

RM310mil – 1.5x our FY11F shipbuilding revenue.

 Still a defensive stock

We continue to view SYSC’s earnings as defensive given

its secured vessel utilisation from the Shin Yang group as
only 60% of its shipping needs are supplied by SYSC’s
fleet.

SYSC is also a liquid proxy into Sarawak’s SCORE given

that the company is a leading direct shipper in East
Malaysia, accounting for 70% of shipping volume from Port
Klang to Miri.

TABLE 2 : SYSC’S SOP BREAKDOWN

CY11F earnings Target PE SOP Valuation methodology
RMmil % x RMmil
Shipping 134.2 71 13 1,758.7 10% discount to shipping industry's 14x
Shipbuilding 44.3 23 7 309.9 20% discount to shipbuilding industry's 9x
Ship repair/metal fabrication 11.7 6 7 81.9 20% discount to shipbuilding industry's 9x
.
Net debt as at 30 Sep 2010 (280.3)

Total 190.2 100 1,870.2

No of shares 1,200.0
SOP/share 1.56
Source: AmResearch

AmResearch Sdn Bhd 3

29 November 2010

4
O c t-1 0
J u l-1 0
CHART 2 : PE BAND CHART

A p r-10
J a n -1 0
O c t-0 9
J u l-0 9
A p r-09
J a n -0 9
O c t-0 8
J u l-0 8
22.0

18.4

14.8

11.2

7.6

4.0

(x )
O c t-1 0
J u l-1 0
CHART 1 : PB BAND CHART

A p r-10
J a n -1 0
Shin Yang Shipping Corporation

O c t-0 9

AmResearch Sdn Bhd

J u l-0 9
A p r-09
J a n -0 9
O c t-0 8
J u l-0 8
10.0

8.0

6.0

4.0

2.0

0.0
(x )
Shin Yang Shipping Corporation 29 November 2010

TABLE 3 : FINANCIAL DATA

Income Statement (RMmil, YE 30 Jun) 2009 2010 2011F 2012F 2013F

Revenue 673.5 605.9 825.5 907.5 994.5

EBITDA 223.7 250.7 306.3 332.1 357.2
Depreciation (61.7) (63.7) (76.1) (78.0) (80.0)
Operating income (EBIT) 162.0 187.0 230.2 254 277.2
Other income & associates 4.3 (17.1) (6.4) 3.0 5.6
Net interest (25.2) (12.5) (25.7) (25.2) (24.7)
Exceptional items (28.3) 0.0 0.0 0.0 0.0
Pretax profit 112.7 157.4 198.0 231.9 258.1
Taxation (11.4) (7.2) (16.8) (19.2) (21.1)
Minorities/pref dividends 0.4 1.6 (6.4) (7.1) (7.7)
Net profit 101.8 151.8 174.8 205.7 229.2
Core net profit 112.1 151.8 174.8 205.7 229.2

Balance Sheet (RMmil, YE 30 Jun) 2009 2010 2011F 2012F 2013F

Fixed assets 1,213.9 1,447.4 1,446.1 1,482.5 1,519.8

Intangible assets 0.0 0.0 0.0 0.0 0.0
Other long-term assets 139.7 96.2 102.7 118.4 136.1
Total non-current assets 1,353.6 1,543.6 1,548.8 1,600.8 1,655.9
Cash & equivalent 242.0 208.3 150.9 235.9 340.8
Stock 175.7 178.9 203.5 223.8 245.2
Trade debtors 443.9 207.2 497.5 547.0 599.4
Other current assets 4.2 0.1 0.1 0.1 0.1
Total current assets 865.8 594.5 852.0 1,006.7 1,185.6
Trade creditors 248.2 165.1 278.2 304.8 334.1
Short-term borrowings 381.4 310.2 304.0 297.9 291.9
Other current liabilities 3.8 8.7 5.9 6.7 7.4
Total current liabilities 633.4 483.9 588.0 609.4 633.4
Long-term borrowings 194.0 166.8 163.5 160.2 157.0
Other long-term liabilities 124.7 123.6 129.8 136.3 143.1
Total long-term liabilities 318.6 290.5 293.3 296.6 300.2
Shareholders’ funds 1,261.7 1,347.9 1,497.2 1,672.2 1,870.8
Minority interests 5.7 15.9 22.3 29.4 37.1
BV/share (RM) 1.05 1.12 1.25 1.39 1.56

Cash Flow (RMmil, YE 30 Jun) 2009 2010 2011F 2012F 2013F

Pretax profit 112.7 157.4 198.0 231.9 258.1

Depreciation 61.7 63.7 76.1 78.0 80.0
Net change in working capital 0.0 158.3 (195.4) (30.5) (35.1)
Others 12.9 (217.2) 59.5 (24.6) (28.9)
Cash flow from operations 187.3 162.2 138.2 254.8 274.0
Capital expenditure 0.0 (59.6) (74.8) (38.3) (39.3)
Net investments & sale of fixed assets 0.0 0.0 0.0 0.0 0.0
Others 0.0 0.0 0.0 0.0 0.0
Cash flow from investing 0.0 (59.6) (74.8) (38.3) (39.3)
Debt raised/(repaid) 0.0 0.0 (60.0) (66.3) (65.3)
Equity raised/(repaid) 0.0 0.0 0.0 0.0 0.0
Dividends paid 0.0 (25.5) (25.5) (30.6) (30.6)
Others (25.2) (12.5) (25.7) (25.2) (24.7)
Cash flow from financing (25.2) (38.0) (111.3) (122.1) (120.6)
Net cash flow 162.1 64.6 (47.9) 94.4 114.1
Net cash/(debt) b/f 162.1 64.6 12.2 160.7 179.5
Net cash/(debt) c/f (333.3) (268.7) (316.6) (222.2) (108.1)

Key Ratios (YE 30 Jun) 2009 2010 2011F 2012F 2013F

Revenue growth (%) 13.2 n/a 36.2 9.9 9.6

EBITDA growth (%) 15.2 12.1 22.2 8.4 7.6
Pretax margins (%) 16.7 26.0 24.0 25.6 25.9
Net profit margins (%) 15.1 25.0 21.2 22.7 23.0
Interest cover (x) 6.4 14.9 9.0 10.1 11.2
Effective tax rate (%) 10.1 4.6 8.5 8.3 8.2
Net dividend payout (%) 0.0 1.4 1.2 1.2 1.1
Debtors turnover (days) 120 196 156 210 210
Stock turnover (days) 48 107 85 86 86
Creditors turnover (days) 67 125 98 117 117

Source: Company, AmResearch estimates

AmResearch Sdn Bhd 5

Shin Yang Shipping Corporation 29 November 2010

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