Cosco Maintain SELL

Sevan Driller 2 will likely be the first order clinched in 2009. According to management, there is practically no enquiry for dry bulk newbuilds but there are interests in ship repairs and conversions. To date, there are no new orders for shipbuilding. The hull of Sevan Driller 1 that was contracted in Mar 07 at US$170m will be delivered to Sevan Marine in Oct 09. COSCO (S) has also received US$10.0m for Sevan Driller 2. The contract is pending finalisation. If this contract materialises, it will be COSCO (S)’s first contract clinched in 2009.

Shipping earnings to fall by 35-50% yoy in 2009. COSCO (S) expects dry bulk shipping revenue to fall by 35-50% yoy in 2009 (2008: S$257.4m). Should the Baltic Dry Index (BDI) remain at around the current level of 3874, two of its dry bulk shipping vessels that were fixed at BDI level of 8000 will be put on voyage charter when their time charter contracts expire in Jun 09 and Aug 09 respectively. The other 10 vessels are on voyage charter at an average charter rate of US$17,000 per vessel day. Management expects BDI to average 3000-3500 for 2009 (ytd average: 2,045). We, however, maintain our forecast of 2500 for 2009.

Maintain SELL. We believe COSCO (S)’s share price will underperform in view of the current low level of contract wins and worse dry bulk shipping market projected for 2010. Maintain SELL, but we raise our fair price from S$0.89 to S$0.95 on a higher P/B valuation for COSCO (S)’s shipping business.

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