Question 1: What is the likelihood of further order cancellations and reschedulings?
Answer 1: The Company is unable to say for certain if there will or will not be further order cancellations and reschedulings, or the extent thereof if any, given the conditions facing the shipping industry at present.
Question 2: Whether the usual seeking of a mandate to issue shares at the annual general meeting of the Company to be held on 20 April 2009 is a precursor to a rights issue?
Answer 2: The Company has no plan at present to undertake a rights issue. The mandate has been a usual item for consideration at the Company’s past annual general meetings and the Company again seeks shareholders’ approval for the mandate at this year’s annual general meeting.
Question 3: How accurate is the policy, in relation to assessing revenue flows, adopted by the Company to only announce newbuilding contracts after the first instalment has been received?
Answer 3: The Company used to announce newbuilding contracts upon the signing of each contract. However, due to the cancellation of some of those contracts, the Company, as a matter of prudence, decided to announce the newbuilding contracts only after the first installment had been received as such payment would better reflect the commitment of the shipowners to the contracts in the current environment.
Question 4: Whether the Company has plan to divest its dry bulk shipping business?
Answer 4: The Company has no plan at present to divest its dry bulk shipping business.
We are valuing COSCO (S)'s shipyard business at a reasonable long-term sustainable annual contract wins of S$2.0b (2007: S$9.0b; 2008: S$1.6b) and a sustainable net profit of S$230m p.a. at a PE of 8.0x, which is in line with small-cap shipyards' valuations prior to the offshore & marine boom in 2003-08. Our contract wins assumption effectively implies COSCO's orderbook will be halved. COSCO (S)'s dry bulk shipping business is valued at 0.40x P/B, which is the typical cyclical trough valuation for the shipping sector. Should dry bulk shipping freight rates rebound, shipyard contract wins in 2009 surpass our assumption, or the global credit crunch eases, COSCO (S)'s share price could see a lift. When China's shipbuilding stimulus package kicks in, sentiments on Chinese shipyards may improve, which in turn may boost COSCO (S)'s share price. Maintain HOLD with a fair price of S$0.89.
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