SINGAPORE (May 8): DBS is maintaining its “hold” call on Cosco Shipping International (S) after the proposed buyout of shipyard units by its parent eliminates insolvency risk.
“Existing investors could hold on for more clarity on future direction of Cosco and potential parental asset injection,” says analyst Ho Pei Hwa in a Monday report.
Last Friday, Cosco reported another substantial loss in 1Q17. Total net provisions for bad debts, obsolete inventory and cost overruns have amounted to $850 million since 4Q14, wiping out 81% of its NTA. The shrinking book value and growing debt have pushed net gearing to an alarmingly high 21x.
Cosco’s parent is offering RMB1,466 million ($300 million) to bail out the bleeding shipyard business, pending China regulatory clearance and shareholders’ approval in an EGM to be held in July or Aug.
Of the consideration, 80% is for the 51% stake in Cosco Shipyard Group (CSG), which is valued at $240 million, just a tag higher than the $220 million parent paid for Sembcorp Marine’s 30% stake in CSG last Oct.
This is largely due to the further depletion in book value on larger accumulated losses over the past two quarters. Nonetheless, the deal remains attractive as Cosco’s ability to operate as a going concern is deteriorating rapidly with the unsustainably high gearing level.
Cosco is expected to record a disposal gain of $285 million. This gives it a chance to revive itself. Post-transaction, its book value should improve from $252 million as of end March to $530 million, lowering the current PB to 1.2x from 1.8x.
Instead of net debt, it will be sitting on cash hoard of $300 million, representing 55% of its book value. This bodes well for acquisition of new businesses as it will be left with a mid-sized dry bulk fleet of six vessels, post disposal of the shipyards.
“Our target price of $0.27 is based on 1.2x est. book value post shipyard disposal, of which 55% is in cash. Strong cash position post disposal presents opportunities for earnings accretive acquisitions,” says Ho.
Shares of Cosco are trading at 29 cents.
