COSCO CORPORATION (S) LTD
F83.SI
Cosco Shipping Int'l (Spore) - Parent to the rescue
- 1Q17 was another loss making quarter.
- Parent is paying c.S$300m to take over the shipyard business.
- Post disposal, Cosco will have net cash of c.13 Scts.
- Maintain HOLD; TP S$0.27.
Maintain HOLD; TP S$0.27, based on 1.2x est. book value post shipyard disposal.
- Cosco Corporation (Cosco) reported another substantial loss in 1Q17, albeit smaller than the past two quarters.
- Total net provisions for bad debts, obsolete inventory and cost overruns have amounted to S$850m since 4Q14, wiping out 81% of its NTA.
- The shrinking book value and growing debt have pushed net gearing to an alarmingly high 21x. Parent’s proposed buyout eliminates insolvency risk.
- Existing investors could hold on for more clarity on future direction of Cosco and potential parental asset injection.
Parent offers c.S$300m to bail out the bleeding shipyard business.
- Cosco announced its parent’s offer price for the proposed buyout of its shipyard business, at cash consideration of Rmb1,466m (approx. S$300m), pending China regulatory clearance and shareholders’ approval (EGM to be held in July/Aug).
- Of the consideration, 80% is for the 51% stake in Cosco Shipyard Group (CSG), which is valued at c.S$240m, just a tag higher than the S$220m parent paid for Sembcorp Marine’s 30% stake in CSG in Oct 2016. This is largely due to the further depletion in book value on larger accumulated losses over the past two quarters.
- Nonetheless, the deal remains attractive as Cosco’s ability to operate as a going concern is deteriorating rapidly with the unsustainably high gearing level.
From distress to de-stress.
- The transaction allows Cosco to turn over a new leaf. Cosco is expected to record a disposal gain of c.S$285m.
- Post-transaction, its book value should improve from S$252m as of end-Mar to approx. S$530m, lowering the current PB to 1.2x (from 1.8x). Instead of net debt, it will be sitting on cash hoard of S$300m, representing 55% of its book value. This bodes well for acquisition of new businesses as it will be left with a mid-sized dry bulk fleet of 6 vessels, post disposal of the shipyards.
Valuation
- Our TP of S$0.27 is based on 1.2x est. book value post shipyard disposal, of which 55% is in cash.
- Strong cash position post disposal presents opportunities for earnings accretive acquisitions.
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
|
http://www.dbsvickers.com/
2017-05-08
DBS Vickers
SGX Stock
Analyst Report
0.270
Same
0.270
