BUY S$0.36 STI : 2,765.15
(Upgrade from Hold)
Price Target : 12-month S$ 0.49 (Prev S$ 0.60)
Reason for Report : Change in recommendation, revision of earnings forecasts, TP.
Potential Catalyst: Contract wins
DBSV vs Consensus: Below on lower day rate assumptions
• Upgrade to BUY for 36% upside to revised TP of S$0.49; compelling valuations at close to -1.5SD historical mean
• With 21% of market cap backed by net cash, record 2.75 Scts FY11 DPS likely sustainable with 7.6% yield
• FY12/13F cut 21%/15%; earnings have bottomed and expect gradual improvement in charter market
Upgrade to BUY - compelling valuations. CHO currently trades at 6.6x FY12 PE and 0.88x FY11 P/BV, close to -1.5SD from its historical average valuations. We believe current valuations are compelling, with the risk-to-reward trade-off back in favour for investors. Hence, we upgrade CHO to BUY.
Strong cash position, steady free cash flows. On the back of strong operating cash flows, CHO’s net cash position of US$43.3m at end FY11 is equivalent to 21% of its current market cap. With no major capex commitments in place, its cash position will build further with steady free cash flows of US$39.1m/ US$43.1m over FY12/13F.
Record dividend sustainable? CHO has reverted to a dividend payout ratio more consistent with pre-FY09, with a 47% payout in FY11, or DPS of 2.75 Scts. With its large cash horde, steady free cash flows, and absence of any significant capex programme, we believe it can at least maintain an annual DPS equivalent to FY11, implying a yield of 7.6% at current price levels.
Earnings have bottomed; TP lowered to S$0.49. We believe earnings and day rates have bottomed, and expect a gradual recovery in the charter market from 2012. We cut FY12/13F by 21%/15% on reduced day rate assumptions. Even so, we believe CHO is able to maintain core net margins of >50% over FY12/13F on the back of good cost control. Our TP is reduced to S$0.49 (prev S$0.60) in line with a lowered FY12F and an adjusted USD/SGD exchange rate.
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