Cosco Corporation - DBS Research 2016-08-08: Potential M&A?

Cosco Corporation - DBS Vickers 2016-08-08: Potential M&A? 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 | http://www.dbsvickers.com/ 2016-08-08
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.300 Same 0.300


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