COSCO CORPORATION (S) LTD
F83.SI
Cosco Corporation - Widened losses
- 3Q16 hit by huge provision for bad debt.
- Expect larger net losses c.S$200m this year.
- Alarmingly high net gearing; will parent co come to the rescue via capital injection or restructuring?
- Maintain HOLD; TP lowered to S$0.27.
Maintain HOLD; TP lowered to S$0.27, following earnings revision, still based on 1.0x FY16 P/BV.
- Cosco Corporation (Cosco)’s gross margin improved by 5.9ppts to 7.4% in 3Q16 but earnings were hit by a huge provision for bad debt of S$262m.
- While there are limited re-rating catalysts from the fundamental front in the near term, we see that there is a possibility of a privatisation of Cosco by its parent in subsequent phases of restructuring of the two shipping giants. The alarmingly high net gearing of 5.6x warrants immediate attention from its parent co, in our view.
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’s bulk carrier fleet may be injected into the merged entity. This could be a re-rating catalyst for Cosco.
Operating environment remains challenging.
- Cosco’s gross order book of US$6.8bn 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$0.27 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 cause its share price to re-rate.
- Last but not least, 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/
2016-11-14
DBS Vickers
SGX Stock
Analyst Report
0.27
Down
0.300
