COSCO CORPORATION (S) LTD
F83.SI
Cosco Corporation - Potential M&A?
- Fifth consecutive quarter of losses in 2Q16.
- Loss-making operations and alarmingly high gearing > 4x raise concerns.
- Parent to the rescue via capital injection or restructuring?
- Reiterate HOLD; TP S$0.30.
Maintain HOLD; TP S$0.30, based on 1.0x FY16 P/BV.
- Cosco Corporation (Cosco) posted a small loss of S$36.8m in 2Q16. We believe multiple headwinds – deferments/cancellations and cost overruns amid the downturn in the sector - have been priced in.
- While there are limited re-rating catalysts from the fundamental front in the near term, we continue to see that there is a possibility of a 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 its parent, Cosco Group, and China Shipping Group (China Shipping) in Dec-2015, Cosco Shipping is now the indirect controlling shareholder of Cosco.
- While the first phase of restructuring does not involve Cosco’s business segments, 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.
Operating environment remains challenging.
- Cosco’s hefty gross order book of US$7.6bn is a double-edged sword.
- The shipbuilding contracts in its order book are of low value while its offshore segment is still on 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 there could potentially be more cancellations given the prolonged downturn.
Valuation:
- Our TP of S$0.30 is 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 lead to a re-rating of its shares. The “bail-out” by its parent would be deemed positive as well.
Pei Hwa Ho
DBS Vickers
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http://www.dbsvickers.com/
2016-08-08
DBS Vickers
SGX Stock
Analyst Report
0.300
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0.300
