Cosco Shipping Int'l (Spore) - DBS Research 2017-05-08: Parent To The Rescue

Cosco Shipping Int'l (Spore) - DBS Vickers 2017-05-08: Parent to the rescue COSCO CORPORATION (S) LTD F83.SI

Cosco Shipping Int'l (Spore) - Parent to the rescue

  • 1Q17 was another loss making quarter.
  • Parent is paying c.S$300m to take over the shipyard business.
  • Post disposal, Cosco will have net cash of c.13 Scts.
  • Maintain HOLD; TP S$0.27.



Maintain HOLD; TP S$0.27, based on 1.2x est. book value post shipyard disposal. 

  • Cosco Corporation (Cosco) reported another substantial loss in 1Q17, albeit smaller than the past two quarters. 
  • Total net provisions for bad debts, obsolete inventory and cost overruns have amounted to S$850m since 4Q14, wiping out 81% of its NTA. 
  • The shrinking book value and growing debt have pushed net gearing to an alarmingly high 21x. Parent’s proposed buyout eliminates insolvency risk.
  • Existing investors could hold on for more clarity on future direction of Cosco and potential parental asset injection.


Parent offers c.S$300m to bail out the bleeding shipyard business. 

  • Cosco announced its parent’s offer price for the proposed buyout of its shipyard business, at cash consideration of Rmb1,466m (approx. S$300m), pending China regulatory clearance and shareholders’ approval (EGM to be held in July/Aug). 
  • Of the consideration, 80% is for the 51% stake in Cosco Shipyard Group (CSG), which is valued at c.S$240m, just a tag higher than the S$220m parent paid for Sembcorp Marine’s 30% stake in CSG in Oct 2016. This is largely due to the further depletion in book value on larger accumulated losses over the past two quarters. 
  • Nonetheless, the deal remains attractive as Cosco’s ability to operate as a going concern is deteriorating rapidly with the unsustainably high gearing level.


From distress to de-stress. 

  • The transaction allows Cosco to turn over a new leaf. Cosco is expected to record a disposal gain of c.S$285m. 
  • Post-transaction, its book value should improve from S$252m as of end-Mar to approx. S$530m, lowering the current PB to 1.2x (from 1.8x). Instead of net debt, it will be sitting on cash hoard of S$300m, representing 55% of its book value. This bodes well for acquisition of new businesses as it will be left with a mid-sized dry bulk fleet of 6 vessels, post disposal of the shipyards.   


Valuation

  • Our TP of S$0.27 is based on 1.2x est. book value post shipyard disposal, of which 55% is in cash. 
  • Strong cash position post disposal presents opportunities for earnings accretive acquisitions.


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/ 2017-05-08
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.270 Same 0.270



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