Brokers' Take

Cosco Corporation

Sep 2 close: $2.54

UBS INVESTMENT RESEARCH, Sept 1

WE have raised our sustainable gross margin assumption from 27 per cent to 32 per cent, keeping the margin flat at current levels versus a previously assumed decline. We have raised our terminal growth assumption from 1 per cent to 2 per cent, as we are now far more confident about Cosco's business execution. We are assuming Cosco Singapore will be able to acquire the balance 19 per cent stake in CSG from its parent in 12 months.

Gross margins in Q2 bounced to 32 per cent (from 25 per cent in Q1) and profit grew 74 per cent q-o-q. We believe margins are likely to be sustained, as Cosco continues to build large world-class shipyards in China and, with SembCorp Marine's technology assistance, manages to secure higher-value-added projects.

Largely due to our higher shipyard estimates, we have raised our 2005-07 EPS estimates for Cosco from 11.5 to 13.5 cents, from 15 to 16 cents, and from 17 to 24 cents, respectively. The larger rise in 2007 is due to the buyout of the minority stake by next year, and our increased gross margin assumption. We are raising our price target to S$3.05 from S$1.90, based on the discounted cashflow value of the yards business and the EV/depreciated fleet value of the shipping business. We are retaining 10 cents in potential value from further restructuring. BUY

Compiled by UMA SHANKARI