Cosco Corporation - DBS Research 2017-02-27: Parent buying out shipyards

Cosco Corporation - DBS Vickers 2017-02-27: Parent buying out shipyards COSCO CORPORATION (S) LTD F83.SI

Cosco Corporation - Parent buying out shipyards

  • Another massive write down in 4Q16.
  • Parent announces preliminary plan to acquire the Shipyard assets from Cosco Corp.
  • Potential injection of new business into Cosco Corp.
  • Maintain HOLD; TP S$0.27.



Maintain HOLD; TP S$0.27, based on 1.8x FY16 impaired book value.

  • Cosco Corporation (Cosco) reported another massive impairment in 4Q16. This brings total impairment to an eye-popping S$1bn in two years, wiping out 75% of NTA since the end of 2014. 
  • The shrinking book value and growing debt have pushed net gearing to an alarmingly high level of 18x. 
  • We advise existing investors to hold on for more clarity on parent’s shipyard buyout proposal and potential asset injection into Cosco.


Parent buying out shipyard; what’s next? 

  • As part of its restructuring efforts to centralise operations and management of its shipyard businesses, parent – Cosco Group - has announced its intention to acquire Cosco’s 51% interest in Cosco Shipyard Group (CSG) and its direct stakes in Cosco Nantong and Cosco Dalian. The deal is still pending finalisation of details. After the proposed disposal, Cosco will be left with a small ship-repair facility in Singapore, and its dry bulk fleet.
  • We believe that its shipping fleet may also eventually be consolidated by the parent’s shipping arm. We believe Cosco’s parent may have other plans for Cosco, i.e. injection of a new business, given that it intends to keep Cosco’s listed status and is not privatising it.


Operating environment remains challenging. 

  • Cosco’s gross order book stood at US$6.4bn, including US$1.3bn worth of contracts for modules of drillships and FPSOs for Brazilian clients. The shipbuilding contracts in its order book are of low value while its offshore segment faces a steep learning curve with its diversified product range. 
  • Making things worse, its O&G customers are delaying rig deliveries in view of the lackluster chartering market and there could potentially be more cancellations given the prolonged downturn. This led to massive impairments in the past two years.


Valuation

  • Our TP of S$0.27 is based on 1.8x FY16 P/BV. 
  • We believe that P/BV is a more appropriate valuation metric than PE, given the low earnings visibility and expectation of losses ahead.


Key Risks to Our View

  • An earlier-than-expected recovery in oil prices could catalyse an industry recovery with Cosco securing more orders at attractive prices.
  • Sharp improvements in productivity could also cause its share price to re-rate. Last but not least, the “bail-out” by its parent would be deemed positive as well.




Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2017-02-27
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.270 Same 0.270



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