Brokers' Take

Cosco Corporation

Cosco Corporation
May 23 close: $2.69
CITIGROUP RESEARCH, May 22

COSCO Corp's latest US$202 million contract win for a semisub hull brings total YTD new orders to S$2.6 billion. The GM5000 hull for customer RedFlag AS is a sister rig of the GM4000 ordered by another customer at the start of 2007. The difference though is that while the first hull had an agreed delivery period of 34 months, this new order has been promised in 30 months.

Issues I - Several areas continue to concern us: (1) new facilities which have not been tested (new yards could experience problems in early operations), (2) questionable related transaction with parent where investors could argue that more than S$100 million in foregone revenues could have been due to the lower price charged (also has taken up space that could have been used for other jobs).

Issues II - (3) Sevan contract with its tight delivery, problems faced by other yards for similar cylindrical rigs, and puzzling transfer from another shipyard to Cosco after nine months of work, (4) lack of experience of new project teams in offshore construction which could lead to potential execution problems, (5) weak Q1 2007 results which was boosted by a surge in scrap metal sales.

Issues III - (6) troubles experienced by other yards trying to break into the offshore sector, (7) promise of early delivery as the group presses ahead for more new orders, (8) sale of shares by management when they expect strong prospects, (9) high earnings expectations by the market and high share price which we feel discounts much of the positives and prices the stock close to execution perfection. Accordingly, we maintain our 'sell' rating on Cosco Corp.

SELL

Compiled by CONRAD TAN