- Biggest offshore contract from repeat customer is a
strong vote of confidence
- Frontrunner among Chinese offshore players riding the
asset replacement cycle
- BUY; Robust order flow in 2011 to drive share price
closer to our S$3.16 TP.
A big leap in offshore. Cosco announced that it has inked LOIs for two drilling units worth US$525m each with Sevan. Total value of US$1.05bn is the biggest single offshore contract Cosco has secured thus far. In addition, the LOIs provide options for up to two rigs totaling US$1.05bn. Good flow of orders from a repeat customer is a vote of confidence for Cosco's offshore capability and product quality. Contracts will be finalised with the approval of listing for Sevan's drilling arm to Oslo exchange by April, raising US$350m to fund the newbuild orders.
The start of the party. This sizeable win follows the footsteps of Singapore rigbuilders. We believe active enquiries received since 4Q10 will translate into firm orders in months ahead, and hence could re-rate Cosco's share price, which has been overshadowed by concerns on dry bulk shipping and steel cost amidst weak market sentiment. Cosco is emerging to be a major offshore player in China, its offshore contribution to revenue is expected to rise from 24% in FY10 to 40% by 2012. It is tendering for offshore orders - FPSOs, semi-sub rigs and wind turbine installation vessels - totaling over US$3bn, which provides upside to our new order win assumptions of US$2bn., if it succeeds in securing them.
Order flow to catalyse share price. Maintain Buy with target price of S$3.16, based on blended FY11/12F PE and P/BV. Catalysts in place are: (1) stronger offshore contract flows; 2) injection of strategic stakes by the parent; and 3) timely shipbuilding delivery. Key risks are steel price increase, RMB appreciation and weaken balance sheet for balloon payment term.
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