Brokers' Take

Cosco Corporation
March 17 close: $1.73

18 March 2005
The Business Times

DBS VICKERS SECURITIES, March 17

WE revised our FY06 estimates for Cosco Corp to take into account higher than expected earnings from its planned capacity expansion. We also raised our one-year target price to $1.93.

Earnings from the less cyclical ship-repair segment will take on a greater profile from this year, making up 52 per cent of earnings compared to 22 per cent in FY04.

Cosco is a high growth company - shipyard capacity is expected to surge from 900,000 dwt currently to 1.2 million dwt by end FY05, 1.7 million dwt by end-2006, and to 2.2 million dwt by 2007.

Although Cosco has outperformed strongly since our last upgrade in early February, we believe that the strong earnings growth momentum supports our adjusted one-year target price of $1.93. Maintain 'buy'.

Its 51 per cent-owned Cosco Shipyard Group is undertaking aggressive expansion plans which will result in capacity rising from 900,000 dwt currently to 2.2 million dwt by 2007. A 300,000 dwt floating dock at Cosco Dalian will be ready by 4Q05, raising Cosco Shipyard's capacity to 1.2m dwt.

Over at Zhoushan Shipyard, two new berths will be completed in May, bringing the total number of berths to three.

A new 500,000 dwt dock will be completed at Zhoushan Shipyard by April 06, and start operations soon after, enabling the repair of rigs and VLCCs.

We estimate that ship-repair is likely to make up 45 per cent of earnings in FY05 and 55 per cent in FY06, compared to 25 per cent in FY04. On the shipping side, Cosco's dry bulk tonnage capacity is expected to jump 29 per cent to close to one million dwt by 2006.

Two renewals are expected to take place in 1Q05 and a further two in 2Q05. We expect these vessels to be renewed at rates 15 per cent higher year-on-year.

FY06 estimates have been adjusted 15 per cent higher to $141.3 million. Growth momentum is expected to be strong, with net profit rising 60 per cent in FY05 and 33 per cent in FY06.

Our one-year target price is adjusted to $1.93, based on five times PE for shipping and 20 times FY06 shipyard earnings. On a PE basis, this works out to 19.7 times and 14.8 times on FY05-06 earnings.
BUY

Compiled by JOYCE KOH