Cosco Shipping Int'l (Spore) - DBS Research 2017-11-06: Making Foray Into Logistic Business

COSCO SHIPPING INTL(S) CO. LTD F83.SI

Cosco Shipping Int'l (Spore) - Making Foray Into Logistic Business

Maintain HOLD; TP adjusted to S$0.33, based on higher 1.4x (1.2x previously) estimated book value post shipyard disposal in view of the better clarity on its new core business ahead.
Cosco has launched a takeover offer to acquire SGX-listed Cogent Holdings Limited (Cogent) – a shipping logistic services provider.
Existing investors could hold on as we await more colour on the new business and potential parental asset injection.

Making an offer to acquire Cogent at S$1.02 per share in cash, representing 3% premium to last traded price. Total consideration of S$488.1m will be funded by the cash raised from shipyard disposal and bank borrowings.
The offer price seems fair, valuing Cogent at c.15x PE, 3.4x P/BV and 10.5x EV/EBITDA.
As a leading integrated logistic service provider with over 40 years track record, acquisition of Cogent paves way into a new core business, expanding parent’s existing network to Southeast Asia, riding on government’s “One Belt One Road” initiative.

Parent’s bail out offer in May 2017 allows Cosco to turn over a new leaf. The transaction is likely to complete by end of 2017. 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-March to approximately S$530m.
Instead of net debt, it will be sitting on a cash hoard of S$300m, representing 55% of its book value. This bodes well for the acquisition of new businesses as it will be left with a mid-sized dry bulk fleet of four vessels, post disposal of the shipyards.

Our TP of S$0.33 is based on 1.4x estimated book value post shipyard disposal, of which 55% is in cash.
Strong cash position post disposal presents opportunities for earnings accretive acquisitions.

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.

Making an offer to acquire Cogent at S$1.02 per share in cash, representing 3% premium over last traded price. Total consideration of S$488.1m will be funded by the cash raised from shipyard disposal and bank borrowings.
Cosco has entered into commitment letter for a loan facility of up to S$350m from Bank of China (BOC) to partially fund acceptances under the offer.
The offer price seems fair, valuing Cogent at c.15x annualised 1H17 net profit, 3.4x book value as at Jun-2017, and 10.5x EV/EBITDA, considering the lucrative ROE of c.25%. Cogent reported net profit of S$16.4m in 1H17 and book value of S$142.7m as at end Jun-2017. Cogent has been churning positive free cash flow of S$5-10m per quarter in recent years.

As a leading integrated logistic service provider with over 40 years track record, acquisition of Cogent paves the way into a new core business, expanding parent’s existing network in North Asia to Southeast Asia, riding on government’s “One Belt One Road” initiative.

Cosco has received irrevocable undertakings from key shareholders totaling 84.33% of Cogent’s outstanding shares.

Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2017-11-06

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.33 Up 0.270