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Cosco Corporation: FULLY VALUED; S$0.88; Bloomberg Code: COS SP
Headwinds remain
Price Target : 12-month S$ 0.80 (Prev S$ 0.88)
• 9M12 net earnings on lower scrap sales and higher interest
expense.
• Partially mitigated by better gross margins
• Challenges ahead with sluggish shipbuilding orders till 2014 and
keener competition in offshore space
• Maintain FULLY VALUED; TP lowered to S$0.80
Higher gross margin a mitigating factor. Cosco reported net profit of S
$26.6m (-17% y-o-y, -4% q-o-q). Similar to 2Q, gross margins stayed high at
12% (+2ppt from 1Q12), lifted by higher shiprepair and conversion margins
of c.18%, while shipbuilding and offshore margins remained low at 9-10%.
Profits were also aided by a reversal of provision for losses of S$8.9m.
However, this is more than offset by the rise in interest expenses and
lower income from scrap materials. Shipping contributed a marginal S$2m to
net profit due to weak freight rates.
Trimmed FY12/13 earnings by 9/24%. 9M12 forms only 67% of our FY12
estimate due largely to lower scrap income and higher interest expenses. We
have trimmed our FY12 net profit by 8.7% on account for these. We have also
cut FY13 net profit by 24.3% as we revise downwards the FY13 order win
assumption from US$3bn to US$2.5bn, raised interest expenses on higher
borrowings, lowered scrap sales on softened steel price and higher minority
interest on greater contribution from the Qidong yard.
All segments under pressure Cosco is under pressure to replenish its
shipbuilding order book as existing orders for 35 vessels will be delivered
by end-2013. However, new orders are dry given the bleak shipping outlook
until 2014, and not only that, newbuild prices are also low at unprofitable
levels. While the offshore market is a brighter spot, competition is stiff
with Chinese peers jumping onto the offshore bandwagon.
Maintain FULLY VALUED; TP lowered to S$0.80. Our TP on Cosco is adjusted to
S$0.80 as we roll over to FY13 revised earnings, pegging to 16x FY13 PE,
similar to Singapore offshore peers. This translates to a reasonable 1.3x
P/Bv against 8-9% ROE. Maintain FULLY VALUED.
Singapore Airlines: HOLD; S$10.58; Bloomberg Code: SIA SP
Lacklustre earnings to continue
Price Target : 12-Month S$ 10.00
• 2Q profit of S$90m slightly below expectations, down 54% y-o-y and
up 16% q-o-q
• Overall yields continued to be weak whilst losses at the cargo
segment widened
• Profitability to remain lackluster, with ROE of just 4% - 5%
projected
• Maintain HOLD and S$10 target price
Yields and demand remained tepid in 2Q13. SIA’s core passenger business
posted a decent EBIT of S$84m (-6% y-o-y) but wider losses at SIA Cargo of
S$50m vs S$17m a year ago and start-up losses at Scoot meant that Group
EBIT fell by 43% y-o-y to S$70m. At half-time, SIA’s profit stands at S
$168m vs our full-year forecast of S$471m. A lower interim dividend of S
6cts was declared vs S 10 cts a year ago.
Outlook remains cloudy. SIA Cargo also announced that it is parking one of
its 13 freighters for nearly 18 months and with demand for premium travel
in the passenger segment unlikely to rebound quickly anytime soon, SIA’s
earnings is likely to remain unexciting. Factoring in the cut in cargo
capacity, our FY13 and FY14 numbers are adjusted by -1% and +2.6%
respectively. SIA’s balance sheet remains strong with net cash of S$3.5bn.
Valuation fair at nearly 1x P/B at ROE of just 5%. Maintain HOLD. While we
expect SIA’s 2H13 earnings to show an improvement from last year, the
projected ROE of 4%-5% for FY13 and FY14 means that at nearly 1x P/B, SIA’s
share price does not have much upside. Our target price of S$10 is based on
0.9x P/B.
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