Cosco - Cancellation and variation of shipbuilding order

1Q FY2009 results. For 1Q FY2009, Cosco reported revenue of S$714.4m (-0.5% yoy) and net profit of S$33.2m (-60.5% yoy). Although ship repair, shipbuilding and marine engineering operations posted an 1.8% increase in turnover, overall revenue declined because of the lower revenue from dry bulk shipping business. Net profit fell as a result of the lower charter rates of dry bulk shipping and higher operational costs of the ship repair, shipbuilding and marine engineering business.

Cancellation and variation of shipbuilding order. Cosco also announced that a European ship owner had cancelled the order for one of its bulk carrier vessels of 57,000 DWT each. The delivery dates for another two vessels had also been rescheduled. In 2009, due to the global economic downturn, we are expecting more rescheduling of ship deliveries and cancellations of orders.

From the list, we note that the average P/E and P/B for the industry are 9.34 and 2.47 respectively. Cosco is currently valued at 9.62 times P/E and 2.54 times P/B. Downgrade from HOLD to SELL with fair value raised from S$0.67 to S$0.92.

Cosco has been downgraded to Sell due to the challenging outlook of the shipbuilding industry. We have changed our valuation based on the price-earning (P/E) method to the price-to-book (P/B) method. This is because we expect volatility in its earnings that can be attributed to changes in costs of raw materials such as steel as well as cancellation or rescheduling of ship deliveries. We feel that the P/B method will reflect the value of its underlying assets. We are valuing Cosco at S$0.92, which works out to 1.5 times book value for FY2009. Since Cosco is a mid-sized shipbuilding company, it is valued below the average P/B for the industry.

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