DBS initiates ‘hold' on Cosco with eye on further logistics growth
DBS Group Research’s Paul Yong has initiated coverage on Cosco Shipping International (Singapore) with a “hold” call and 26 cents price target, with a view that the company is well-positioned to ride on Singapore’s role as a regional logistics hub and that the management is eyeing possible acquisitions to grow this business.
Cosco Shipping International (Singapore) was previously known as Cosco Corp (Singapore). More than a decade ago, it was an investors’ favourite as it rode the shipping boom and its share price hit a peak of $7.60 in 2007, but things turned south following the Global Financial Crisis.
The company was renamed in 2017 after it divested its loss-making shipbuilding business. Following the 2018 acquisition of then SGX-listed logistics player Cogent Holdings for $490 million, Cosco Shipping International’s focus shifted to logistics, property management, and ship repair and marine engineering.
The company’s ultimate owner is Cosco Shipping Corp, a China state-owned enterprise and one of the largest shipping groups in the world.
According to DBS analyst Yong in his April 29 note, Cosco Shipping International (Singapore) is now trading at around 0.9x its book value for FY2021 ended December 2021, which is one standard deviation below its five-year mean, and is deemed as fairly valued, given his projected FY2022 ROE of 4.1% and a peer average of 1x price to book against a corresponding average ROE of 7%.
Yong notes that the company’s revenue has been trending up from FY2018 to FY2021, led by gains in its core logistics segment and the shipping segment, although somewhat offset by lower ship repair and marine engineering and property management.
Specifically, the logistics revenue of $146 million accounted for 74% of the company’s FY2021 total of $198.5 million, which was up 7% over FY2020.
The company’s FY2021 earnings, up 261% y-o-y to $30.1 million, were boosted by a oneoff gain of $16.4 million from the sale of its 60% interest in Cosco Shipping (Singapore) for US$42.4 million ($58.8 million).
Going forward, Yong expects the earnings to normalise, with a forecast of $12.6 million and $13.2 million for FY2022 and FY2023 respectively.
He sees the company as well-positioned for inorganic growth, given its cash balance of around $100 million and a net debt-to-equity ratio of 0.44x in FY2021, down from 0.5x in FY2020. He expects this ratio to further trend down to 0.37x in FY2022 and 0.31x in FY2023.
While the company has not announced any expansion plans, the management has indicated they will look for value-accretive opportunities, in line with the company’s vision of becoming the best integrated shipping and logistics service provider in South and Southeast Asia.
“Going forward, demand for warehouse space in Singapore should be robust, in line with the economic recovery in 2022 and continued expansion of the logistics sector,” says Yong.
“Cogent’s warehouses are currently operating above optimal capacity, but an upside to earnings could come from acquisitions,” he adds.
For Yong, a key asset is the Cogent 1.Logistics Hub, which integrates warehousing space with a patented rooftop container depot that can store 16,000 empty 20ft-equivalent units.
The hub is near Jurong Port and also the refinery hub Jurong Island, where the hub’s purpose-built facilities capable of storing dangerous cargo is coming in handy for chemical storage.
“By integrating the supply chain, productivity is heightened, as the transport cycle and waiting time are shortened. This brings about time and cost savings for its customers as compared to the typical supply chain where the warehouse and container depots are at different locations,” Yong elaborates.
While the company’s logistics business is looking up, there are a couple of other factors at play in its other business segments.
Via Cogent, the company manages The Grandstand, a 1 million sq ft shopping and lifestyle centre in Bukit Timah, which contributed the bulk of its property management revenue. The contribution totalled $12.5 million in FY2021, or some 6% of Cosco Shipping International’s total.
“Prospects are uncertain after the final extension of the lease expires on Dec 31, 2023, as the company has not announced any continuity plans,” warns Yong.
He also reminds investors that the company has not paid dividends since 2014 and that there is no specific dividend policy in place. “Management shared that as they are currently evaluating strategic moves to expand the business, they are not paying out dividends to shareholders,” says Yong.