A sell recommendation on Cosco

Cosco faces similar difficulties as shipping companies. Currently, there is excess capacity in the shipping industry and shipping companies are laying up vessels. As a result, the shipping companies are not placing orders for new vessels. In some instances, the shipping companies reschedule and/or cancel the orders for new vessels. Cosco has seen its share of reschedules and cancellations, and we believe that the trend will continue for the rest of this year and early next year.

Earnings estimates. The reschedules and cancellations are expected to cause the profit to decline from S$302.6m in FY2008 to S$174.2m in FY2009F. We expect improvement to begin towards the second half of next year, which is likely to lift the profit to S$193.0m and S$230.9m in FY2010F and FY2011F respectively.

From the list, we note that the average P/E and P/B for the industry are 13.30 and 2.60 respectively. Cosco is currently valued at 9.10 times P/E and 2.41 times P/B.

Recommendation. We have a sell recommendation on Cosco with a fair value of S$1.14, which is 2.2 times book value for FY2009F. We feel that Cosco may face further downward adjustments in profit and cash flow due to more reschedules and cancellations of vessel deliveries. Moreover, we expect only a few, if any, contracts for the construction of new vessels given that shipping companies are still idling vessels.

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