Upgrade to Neutral from Trading Sell. Cosco Nantong has surprised us by signing a letter of intent (LOI) with Sevan Marine to construct two Sevan 650 drilling units for US$525m each with options for two more; we were originally expecting a contract award for only one unit. Signing of the final contracts is subject to the listing of Sevan Drilling. This order brings Cosco's YTD order wins to US$1.29bn or 50% of our US$2.5bn target for 2011. We believe the sizeable win will dispel investors' fears over potential shipbuilding order cancellations. We now peg Cosco at 15x CY12 P/E (previously 11x, its average trading band during the last crisis) in view of its order book momentum. This represents a 15% discount to Singapore rig builders. Accordingly, our target price climbs to S$2.38 from S$1.74. However, with the threat of rising steel prices, we only upgrade Cosco to Neutral. We see further re-rating catalysts from stronger-than-expected margins in shipbuilding and order wins.
The news
Signed LOI for two Sevan drilling rigs. Cosco has signed a LOI with Sevan Marine for the turnkey construction of two Sevan 650 drilling units for US$525m each with options for two similar units. Deliveries are scheduled for 4Q2013 and 2Q2014, respectively.
Comments
More than expected. The LOI signed is for two cylindrical rigs with options for another two. We previously expected the award of only one unit by end-2011, pending the IPO of Sevan Marine's drilling division. As at 25 Mar 11, Sevan had submitted its application for a listing of Sevan Drilling ASA to further develop its ultra deep-water rig business. The IPO is expected in April and could raise about US$350m from a secondary sale of shares by Sevan Marine.
Cosco to finance construction with 20:80 payment terms. According to Sevan's statement, the payment structure is 20% payable upon signing of the final construction contracts and 80% upon delivery. Signing of the final contracts is subject to the listing of Sevan Drilling.
Aggressive bidding; more orders in the pipeline. Cosco has been trying to build up a reputation in the international offshore market as could be seen in its bidding for the latest US$1bn CJ70 Maersk project (awarded to Keppel). Upstream recently reported that Cosco and Sevan Marine are bidding for the construction and supply of a FPSO for Dana Petroleum (owned by Korea National Oil) for deployment in the UK. The other contender is a consortium of Samsung Heavy Industrials and Teekay Petrojarl. The award for Dana's FPSO is expected by end-2Q11 or 3Q11 with delivery some time in 2013. While we are not bullish that Sevan Marine will exercise the option for the two additional 650 cylindrical rigs due to financing, we believe Cosco stands a good chance of closing other offshore projects given its aggressive bidding. We keep our US$2.5bn order target for 2011.
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