Cosco Corporation - DBS Research 2015-12-14: No Privatisation In Sight

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COSCO CORPORATION (S) LTD F83.SI 

Cosco Corporation - No Privatisation In Sight 

Downside risks. 

• We downgrade Cosco to FULLY VALUED with a reduced TP of S$0.32 (prev S$0.42), as we lower our valuation multiple from 0.8x to 0.6x FY16 P/BV in view of wider losses and a deteriorating outlook. 
• There is a lack of rerating catalysts with the elimination of privatisation angle. 
• Cosco faces multiple headwinds – deferments/cancellations and cost overruns amid the sector’s downturn. We expect price weakness post lifting of suspension as share price has been “held up” by the suspension over the past 3-4 months. 
• Cosco is expected to report another quarter of losses in 4Q15. We will look to revise down our forecasts post results. 

Downward pressure on margins. 

• Cosco’s hefty gross orderbook of US$7.9bn is a double-edged sword. The shipbuilding contracts on its orderbook are of low value while its offshore segment continues to see a steep learning curve with its diversified product range. 
• Making things worse, its O&G customers are delaying rig deliveries in view of the lacklustre chartering market. 

Lingering concerns over the drillship and cylindrical rig sagas. 

• Given the weak market sentiment and abundant supply of new drilling rigs, it will be challenging for Cosco to conclude the sale of the cancelled drillship unit. 
• Meanwhile, the 4th Sevan cylindrical rig unit, which is near completion, faces risk of cancellation as the customer has failed to secure a charter contract and Cosco is held responsible for the delivery delay. 

Valuation: 

• We lower our target price to S$0.32, pegged to a lower multiple of 0.6x FY16 P/BV (0.8x previously). 
• P/BV is a more appropriate valuation metric than PE, given the low earnings visibility and expectation of losses ahead. 
• We downgrade the stock to FULLY VALUED in view of downside risks. 

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 shares to re-rate.

Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2015-12-14

DBS Vickers SGX Stock Analyst Report FULLY VALUED Downgrade HOLD 0.32 Down 0.42