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Cosco Corporation - DBS Research 2016-05-09: Watch for parent’s restructuring

Cosco Corporation - DBS Research 2016-05-09: Watch for parent’s restructuring COSCO CORPORATION (S) LTD F83.SI 

Cosco Corporation - Watch for parent’s restructuring 

  • Fourth consecutive quarter of losses in 1Q16. 
  • Net gearing of 3.9x is a concern; possible parental support? 
  • Watch for parent’s restructuring. 
  • Upgrade to HOLD; TP raised to S$0.30. 


Upgrade to HOLD; TP S$0.30. 

  • We upgrade Cosco to HOLD with a raised TP of S$0.30, based on 1.0x FY16 P/BV. 
  • It posted a smaller loss of S$14.4m for 1Q16. 
  • We believe the multiple headwinds – deferments/cancellations and cost overruns amid the sector’s downturn, have been priced in. 
  • While there might be limited re-rating catalysts from fundamental front in the near term, we continue to see possible privatisation of Cosco by its parent in subsequent phases of restructuring of the two shipping giants. 

Watch for parent’s restructuring. 

  • Following the restructuring of parent – Cosco Group and China Shipping (Group) (“China Shipping”) in Dec-2015, Cosco Shipping has become the indirect controlling shareholder of Cosco. 
  • While the first phase of restructuring does not involve Cosco’s business segments for now, we do not rule out the possibility of further restructuring in the future as China Shipping also owns a small shipyard. 
  • In addition, Cosco has a bulk carrier fleet that may be injected into the merged entity. This could be a re-rating catalyst for Cosco. 

Sector headwinds remain. 

  • Cosco’s hefty gross order book of US$7.6bn is a double-edged sword. The shipbuilding contracts on its order book 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. 

Valuation: 

  • We upgrade Cosco to HOLD with a raised TP of S$0.30, based on 1.0x FY16 P/BV. 
  • P/BV is a more appropriate valuation metric than PE, given the low earnings visibility and expectation of losses ahead. 

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. 
  • 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/ 2016-05-09
DBS Vickers SGX Stock Analyst Report HOLD Upgrade FULLY VALUED 0.30 Up 0.24


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