Cosco - A contract win may boost sentiment but valuations not supported by fundamentals

COSCO Corp has secured its first contract for FY09; COSCO Dalian was awarded a contract to convert a VLCC to a FPSO vessel by Modec for an undisclosed amount.
While the contract win may be positive for sentiment on the stock, COSCO is well shy of our S$1 bn (US$640 mn) new contract assumptions for FY09 (Fig. 1).

We remain concerned about its shipbuilding business due to delayed deliveries and no demand. On our estimates, shipbuilding contributes S$2 bn (or 47%) to COSCO’s FY09E revenues, with ship repair (S$0.9 bn), conversions (S$1.15 bn) and shipping (S$0.15 bn) accounting for the remainder. We would caution that visibility on COSCO’s revenues and earnings remains limited.

At S$1.10, COSCO is trading at a FY09E P/E of 9.3x and P/B of 2x, at nearly twice the valuation of Yangzijiang, which is executing well and is our preferred exposure on the sector. There is no change in our estimates and rating for COSCO pending 1Q09 management on 7 May. Maintain UNDERPERFORM with a target price of S$0.51.

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