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Cosco Corporation - DBS Research 2016-02-16: From bad to worse

Cosco Corporation - DBS Research 2016-02-16: From bad to worse COSCO CORPORATION (S) LTD F83.SI 

Cosco Corporation - From bad to worse 

  • Massive impairments/provisions in 4Q drags FY15 into a huge loss of S$570m
  • Expected to remain in the red for the next 2 years
  • Net gearing of 3.7x is a concern
  • Maintain FULLY VALUED with a reduced TP of S$0.24



No signs of recovery. 

  • We maintain FULLY VALUED on Cosco with a reduced TP of S$0.24 (prev S$0.32), based on 0.8x FY16 P/B. 
  • The huge S$570m net loss in FY15 has wiped out almost 40% of its book value. 
  • We see limited re-rating catalysts with the elimination of the privatisation angle in the near term. 
  • Cosco continues to face multiple headwinds – deferments/cancellations and cost overruns amid the sector’s downturn. 

Challenges ahead. 

  • Cosco’s hefty gross orderbook of US$8bn 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 and could potentially see more cancellations in a prolonged downturn. 

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$0.24, as book value was impaired by the big losses in 4Q15, pegged to 0.8x FY16 P/BV. 
  • 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.



Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2016-02-16
DBS Vickers SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 0.24 Down 0.32


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