Brokers' Take

Cosco Corporation (S'pore)

Sept 21 close: S$1.66

UBS INVESTMENT RESEARCH, Sept 19

COSCO has won a US$120 million order for offshore drilling and production hull. The contract for the drill ship hull is from MPF Corp and will be carried out at Cosco's Dalian shipyard. We expect revenue recognition to begin in 2007 with delivery targeted in 1H08. Exercise of the option for another similar vessel would depend on equity and offshore market conditions.

Original order book estimates too low: With this contract in the bag and the strong likelihood of more orders announced soon, our original assumption that Cosco would book in S$610 million conversion works over the entire FY07-FY08 timeframe now looks too conservative. We have raised our estimates to S$550 million of project revenue in FY07 and S$700 million in FY08.

Raising FY07 and FY08 EPS estimates by 12 per cent: Another important EPS and share price catalyst is that the restructuring of parent China Ocean Shipping Group's holdings of shipping and shipyard assets is still ongoing, based on our recent checks with the company. Our FY06 net profit forecasts are raised by S$22 million to include gains on sales of four vessels, announced earlier this year.

Price target raised to S$1.89 from S$1.72 previously: Our target is based on an 18 times earnings multiple for FY07E shipyard earnings, which we believe is justified by the strong 70 per cent shipyard growth expected in 2007. We use a 10 times multiple on the ship agency business and a replacement value approach for the shipping assets.
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Compiled by MATTHEW PHAN