Brokers' Take

Cosco Corporation

Cosco Corporation
June 15 close: S$3.38
CITIGROUP RESEARCH, June 14

EARNINGS raised: We have raised our FY07E new orders assumption to S$7 billion (from S$3 billion), increasing our FY07E to FY09E earnings estimates by between 8 per cent and 19 per cent. We have accordingly raised our price target from S$2.58 to S$2.96.

Kudos to Cosco: The latest contract wins in shipbuilding totalling S$1.8 billion were stronger than expected. However, with the stock having surged 8.4 per cent two days before the announcement and adding S$1.5 billion to the market cap since the move, we feel much of these positives has already been priced in.

No change to view: As Cosco aggressively builds its offshore order book, we feel a major risk is that it may be over-promising on delivery deadlines, which could hurt it at a later date. In light of problems seen at other yards, including previously at major North Asian players, we believe execution risk is real and relevant for Cosco, considering its inexperience and new facilities.

Still at discount? Our discussion with the management suggests that Cosco's latest related contract for four car carriers amount to US$51.75 million each, below the rate charged by other yards (US$58-60 million) for slightly smaller vessels and with longer deliveries. Investors may argue that Cosco could have charged an even higher price than Xiamen yard considering the larger vessels and quicker delivery.

Other issues: Apart from execution risk, we are maintaining our negative view on Cosco for its lofty valuations, disposal of shares by the management, weak 1Q07 results, and related transactions with parent. There have been some recent share trades by directors.

SELL

Compiled by Matthew Phan