Brokers' Take

Cosco Corporation

Feb 16 close: $1.23
KIM ENG RESEARCH, Feb 14

COSCO Corporation reported FY2005 net earnings growth of 148 per cent to $160.5 million, slightly below our forecast of $165.6 million. This figure was ahead of consensus. Turnover of $873 million was, however, below our expectation, but this also implies that the overall gross margin of 32.2 per cent was ahead of our expectation of 30 per cent.

On the shipyard side, gross margins stood at 26.2 per cent, which has seen sequential improvement. The margin improvement was attributable to a better mix of value added shipyard work, such as double hull conversions and module fabrication. This also resulted in average revenues per ship of $1.1 million in FY05 versus $0.9 million the previous year. As for shipping, despite a softening of the Baltic dry index, bulk shipping around China remained firm, resulting in gross margins of 63 per cent.

While Cosco booked additional gains of over $40 million due to the sale of scrap metal, this was also within our forecasts. Another $12.8 million in exceptional gains came from the sale of the ship MV Cos Hero in 3Q05. Separately, Cosco also declared a final dividend of 2 cents per share, which, though unexciting, was not unexpected.

We are leaving our forward forecasts unchanged, as these results give us no cause to do so. FY06 net profit forecast stands at $185 million, or an EPS of 8.5 cents. Overall, the two-year forward EPS compounded annual growth rate is forecast at 17 per cent. This will be driven by: i) strong demand for ship repair services, as Cosco shipyards are still the cheapest in the world; ii) the addition of 32 per cent more shipyard capacity; and iii) continued demand for bulk commodities as China fuels its economic boom. We are also maintaining our 'buy' recommendation and our target price of $1.54 for the stock.

BUY