We downgrade Cosco to FULLY VALUED with a reduced TP of S$0.32 (prev S$0.42), as we lower our valuation multiple from 0.8x to 0.6x FY16 P/BV in view of wider losses and a deteriorating outlook. There is a lack of rerating catalysts with the elimination of privatisation angle. Cosco faces multiple headwinds – deferments/cancellations and cost overruns amid the sector’s downturn. We expect price weakness post lifting of suspension as share price has been “held up” by the suspension over the past 3-4 months. Cosco is expected to report another quarter of losses in 4Q15. We will look to revise down our forecasts post results.
Downward pressure on margins
Cosco’s hefty gross orderbook of US$7.9bn is a double-edged sword. The shipbuilding contracts on its orderbook are of low value while its offshore segment continues to see a steep learning curve with its diversified product range. Making things worse, its O&G customers are delaying rig deliveries in view of the lacklustre chartering market.
Lingering concerns over the drillship and cylindrical rig sagas
Given the weak market sentiment and abundant supply of new drilling rigs, it will be challenging for Cosco to conclude the sale of the cancelled drillship unit. Meanwhile, the 4th Sevan cylindrical rig unit, which is near completion, faces risk of cancellation as the customer has failed to secure a charter contract and Cosco is held responsible for the delivery delay.
We lower our target price to S$0.32, pegged to a lower multiple of 0.6x FY16 P/BV (0.8x previously). P/BV is a more appropriate valuation metric than PE, given the low earnings visibility and expectation of losses ahead. We downgrade the stock to FULLY VALUED in view of downside risks.
Key Risks to Our View:
An earlier-than-expected recovery in oil prices could catalyse an industry recovery with Cosco securing more orders at attractive prices. Sharp improvements in productivity could also cause its shares to re-rate. (Read Report)
Source : DBS Group Research