Cosco Shipping Int'l (Spore) - DBS Research 2017-08-08: Hint Of Future Direction?

Cosco Shipping Int'l (Spore) - DBS Vickers 2017-08-08: Hint Of Future Direction? COSCO SHIPPING INTL(S) CO. LTD F83.SI

Cosco Shipping Int'l (Spore) - Hint Of Future Direction?

  • Cosco Shipping International (Cosco)’s Losses narrowed in 2Q17.
  • Proposed acquisition of 40% stake in a logistic service provider could be a hint of future direction.
  • EGM for shipyard disposal will be held on 30 August.
  • Maintain HOLD; TP S$0.27.



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

  • Cosco Shipping International (Cosco)’s net losses seemed to have narrowed in 1H17. 
  • Parent’s proposed buyout eliminates insolvency risk, which would otherwise be a key overhang at an alarmingly high net gearing of 23x. 
  • Existing investors could hold on for more clarity on Cosco's future direction and potential parental asset injection. 
  • Could Cosco’s MOU to acquire a 40% stake in PT Ocean Global Shipping (a shipping logistic service provider) from sister company, a hint about its possible future core business? 


Parent’s offers to bail out the bleeding shipyard business pending approvals. 

  • Parent had offered to buy out Cosco’s shipyard business for Rmb1,466m cash (approximately S$300m) in May 2017, pending shareholders’ approval (EGM to be held on 30 August) and China regulatory clearance. 
  • Of the consideration, 80% is for the 51% stake in Cosco Shipyard Group (CSG), which is valued at c.S$240m, just a tad higher than the S$220m parent paid for Sembcorp Marine’s 30% stake in CSG in October 2016. This is largely due to the further depletion in book value on larger accumulated losses.
  • 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-March to approximately S$530m, lowering the current P/BV to 1.2x (from 1.8x). 
  • Instead of net debt, it will be sitting on a cash hoard of S$300m, representing 55% of its book value. This bodes well for the acquisition of new businesses as it will be left with a mid-sized dry bulk fleet of four vessels, post disposal of the shipyards.


Valuation

  • Our TP of S$0.27 is based on 1.2x estimated 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. 


WHAT’S NEW


Losses narrowed. 1Q17 results review 

  • Narrowed losses in 1H17. Cosco posted a net loss of S$21m in 2Q17, largely due to the expected loss on contracts of S$45m. On a positive note, the losses have narrowed from S$79m in 1Q17 and S$313m in 4Q16.
  • Net gearing shot up to 23x as at end-June 2017, from 21x a quarter ago and 3.7x in December 2015, arising from deferments, deteriorating payment terms and shrinking book value.

Parent’s proposed takeover of shipyard business pending approvals 

  • Parent’s proposed takeover eliminates the going concern issue. Parent offered Rmb1,466m cash (approximately S$300m) to take over Cosco Shipyard Group in May 2017.
  • The deal is pending shareholders’ approval (EGM has been scheduled for 30 August) and China’s regulatory clearance.

Turns over a new leaf. 

  • Cosco is expected to record a disposal gain of c.S$285m. Post transaction, book value should improve from S$252m as of end-March to approximately S$530m, lowering current P/BV to 1.2x (from 1.8x). The deal will turn it from net debt to net cash position, sitting on a cash hoard of S$300m, representing 55% of its book value.
  • This bodes well for acquisitions of new businesses as it will be left with a mid-sized dry bulk fleet of four vessels post disposal. The future direction of Cosco remains to be seen, pending potential acquisitions.

MOU to acquire an Indonesian logistic service provider drops hints of future direction? 

  • Proposed acquisition. Together with 2Q17 results, Cosco announced that it has entered into a non-binding MOU with sister company - Cosco Shipping (South East Asia) Pte Ltd in relation to the proposed acquisition of approximately 40% of PT Ocean Global Shipping (Ocean Global).

Who is Ocean Global? 

  • It is engaged in logistic service, container canvassing and management, ship agency and chartering and bunkering. It owns 100% of PT. Global Terminal Marunda, whose principal activities are container storage and maintenance.

Finalising terms. 

  • The involved parties are in negotiations to finalise the terms before signing the Sales and Purchase Agreement. The purchase consideration is expected to be less than 5% of Cosco’s NTA.

Hints of future direction? 

  • While it seems to be a small acquisition, we wonder if this could be the new business of focus going forward and that parent will consolidate and park the shipping logistic business in SEA under Cosco.




Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2017-08-08
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.270 Same 0.270



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