Brokers' Take

Cosco Corp (S$0.86) -1H04 Results Note

28 July 2004
Kelive.com

Cosco reported 1H04 NPAT of S$30.8m (+281%); this was ahead of consensus and exceeded our estimates of S$24.5m. Both dry-bulk and shipyard associates contributed to the strong earnings. We have revised our FY04E NPAT from S$52m to S$61m and FY05E to S$89.6m from S$71m. Namely, this is to account for higher margin mix at the shipyards and the proposed 51% acquisition of Cosco Shipyard Group (CSG). CSG is the holding entity for five yards in China, including Natong and Dalian yards, both investee companies of Cosco (50% and 40%, respectively).
 
Bulk carrier operations remain on strong footing despite the fall in Baltic Dry Index. Six of Cosco's 14 vessel fleet will be renewed between 4Q04 and 1Q05. Management believes that stability has been restored to the charter markets and expects rates to remain firm for the remainder of the year. We expect renewals to be carried out at 18-20% premiums over Fy03.
 
Financing terms of the shipyard acquisitions has not been finalised but Cosco made an explicit statement during the conference brief that it would resort to internal resources for funding; this is positive as it entails nil dilution risks. Based on prior transactions involving Nantong and Dalian, we expect pricing to be transacted near fair value NAVs.
 
We have revised our fair value for Cosco upwards to $1.08/share. Our target valuation is based on 13x Fy05E PE, being the average of listed shipyard and bulk carrier peers. There is still scope for earnings to be re-rated upwards if Cosco's parent, Cosco Group (CG), moves to inject additional bulker assets into the group. CG is the world's largest bulk operator with an armada of 296 bulkers totaling 15m DWT. Our target price implies price upside of 25%. Maintain Buy.

By ONG SENG YEOW