Cosco Shipping Int'l (Spore) - DBS Research 2017-11-06: Making Foray Into Logistic Business

Cosco Shipping Int'l (Spore) - DBS Vickers 2017-11-06: Making Foray Into Logistic Business COSCO SHIPPING INTL(S) CO. LTD F83.SI

Cosco Shipping Int'l (Spore) - Making Foray Into Logistic Business

  • Parent’s bail out is expected to complete soon.
  • Making an offer to acquire Cogent.
  • New core business focuses on shipping logistic in Southeast Asia.




Maintain HOLD; TP adjusted to S$0.33.

  • Maintain HOLD; TP adjusted to S$0.33, based on higher 1.4x (1.2x previously) estimated book value post shipyard disposal in view of the better clarity on its new core business ahead. 
  • Cosco has launched a takeover offer to acquire SGX-listed Cogent Holdings Limited (Cogent) – a shipping logistic services provider.
  • Existing investors could hold on as we await more colour on the new business and potential parental asset injection.


Making an offer to acquire Cogent

  • Making an offer to acquire Cogent at S$1.02 per share in cash, representing 3% premium to last traded price. Total consideration of S$488.1m will be funded by the cash raised from shipyard disposal and bank borrowings. 
  • The offer price seems fair, valuing Cogent at c.15x PE, 3.4x P/BV and 10.5x EV/EBITDA. 
  • As a leading integrated logistic service provider with over 40 years track record, acquisition of Cogent paves way into a new core business, expanding parent’s existing network to Southeast Asia, riding on government’s “One Belt One Road” initiative.

From distress to de-stress. 

  • Parent’s bail out offer in May 2017 allows Cosco to turn over a new leaf. The transaction is likely to complete by end of 2017. 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. 
  • 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$0.33 is based on 1.4x 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 - 


Acquiring a logistic service provider 

  • Making an offer to acquire Cogent at S$1.02 per share in cash, representing 3% premium over last traded price. Total consideration of S$488.1m will be funded by the cash raised from shipyard disposal and bank borrowings. 
  • Cosco has entered into commitment letter for a loan facility of up to S$350m from Bank of China (BOC) to partially fund acceptances under the offer.
  • The offer price seems fair, valuing Cogent at c.15x annualised 1H17 net profit, 3.4x book value as at Jun-2017, and 10.5x EV/EBITDA, considering the lucrative ROE of c.25%. Cogent reported net profit of S$16.4m in 1H17 and book value of S$142.7m as at end Jun-2017. Cogent has been churning positive free cash flow of S$5-10m per quarter in recent years.

Complements parent’s existing business. 

  • As a leading integrated logistic service provider with over 40 years track record, acquisition of Cogent paves the way into a new core business, expanding parent’s existing network in North Asia to Southeast Asia, riding on government’s “One Belt One Road” initiative.

Irrevocable undertakings. 

  • Cosco has received irrevocable undertakings from key shareholders totaling 84.33% of Cogent’s outstanding shares.




Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2017-11-06
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.33 Up 0.270



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