We are turning slightly positive in our medium-term outlook, as we note of Cosco's capability to undertake offshore conversion projects from its recent award from Modec. Separately, we note that Cosco is finalising two other FPSO conversion projects valued at a total of US$150m. In addition, we think stabilisation in the dry bulk market is likely, considering the demand-supply conditions. Any recovery in the BDI is positive for Cosco as 1) it reduces the possibility of further cancellations, 2) increase revenue for its dry bulk shipping division as the current rates are based on spot market.
Still, we do not deny that the near-term outlook is bleak, with more order cancellations expected and 2Q09 could possibly be the worst quarter. Going forward, we remain concerned over yard execution and potential late delivery penalties as the management has once again reduced their guidance on vessel deliveries from 25 to 15 for FY09. We pared down our FY09 and FY10 topline down by 7% and 3% respectively. FY09 and FY10 bottomline were reduced by 25% and 14% correspondingly as we take into account lower 1Q09 numbers, reduced margins from shiprepair and shipping as well as higher tax rates.
Recent rally signified increased risk-reward appetite, TP raised, but SELL maintained. We revise up the target price to S$0.92 (from S$0.74), more skewed toward pre-shipbuilding boom cycle PB range of 1.5x P/B, to reflect subsiding risk adverse sentiment in the market. Maintain SELL.
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