Cosco Corporation Ltd: Gaining traction with international customers

Tender rig option exercised
Maintain Neutral. Cosco announced that Seadrill has exercised one of the two options to build a tender rig for US$66m excluding owner-furnished drilling equipment. The unit, T17, is similar to T15 and T16 awarded to Cosco in Feb 2011. YTD, Coscohas secured US$1.35bn of orders or 54% of our US$2.5bn order target for FY11. Though Cosco's order momentum remains strong, we are concerned about rising steel prices and potential dry-bulk cancellations. Hence, we maintain Neutral. We would revisit the stock upon stronger-than-expected margins in shipbuilding and order wins. Our target price is unchanged at S$2.38, still based on 15x CY12 P/E, a 15% discount to Singapore rig-builders.

The news
Seadrill has exercised one of the two options for Cosco to build another tender rig for US$115m (2% higher in value than previous orders). The unit, T17, is scheduled for delivery in 1Q13. It would be similar to the first two tender rigs ordered from Cosco in Feb 11.

Comments
Gaining traction with international customers. The latest order reflects international drillers' increasing confidence in Cosco. Other than its close relationship with Sevan Marine, other international customers such as Norway-based MARACC and NASDAQ-listed ATP Oil & Gas Corporation have given Cosco a vote of confidence and expanded work scope for their GM4000 and Octbuoy semi-sub vessels respectively. We believe Cosco is eager is build up its reputation in the international offshore market, as suggested by its bidding for the latest US$1bn CJ70 Maersk project (awarded to Keppel).

YTD, Cosco has secured US$1.35bn of orders or 54% of our US$2.5bn order target for FY11.

Rising steel prices and potential dry-bulk cancellations. Cosco's shipbuilding gross margins of about 6% leave little room for manoeuvring if steel prices continue to climb. The impact on its earnings could be evident from 2012 onwards. In addition, should weakness in the BDI persist, there could be postponement or cancellation of some dry-bulk orders.

Valuation and recommendation
Maintain Neutral and target price of S$2.38, still based on 15x CY12 P/E, a 15% discount to Singapore rig-builders. Though Cosco's order momentum remains strong, we are concerned about rising steel prices and potential dry-bulk cancellations. Hence, we maintain Neutral and would revisit the stock upon stronger-than-expected margins in shipbuilding and order wins.

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