Singapore stock market update

Macquarie remains Bearish on Singapore listed Cosco :

Event
Order cancellation and deferrals over the past month will result in delayed
profit recognition, affecting COSCO’s DCF-derived valuation. We are also
concerned about the possibility of balance sheet write-downs, which we
suspect is behind the company’s profit warning. We therefore lower our target
price from S$0.69 to S$0.65, while retaining our Underperform rating.

Impact
Order cancellations and deferrals have begun: Two orders have been
cancelled and a further ten have been deferred; incidentally this is equivalent
to the sum-total of all shipbuilding orders won by COSCO in 2008. That the
affected orders were all won in mid-2007 is all the more alarming given that
orders placed in 2008 would be less expensive to cancel for COSCO’s clients.
We expect further cancellations and/or deferrals through the remainder of
2009.

Balance sheet write-downs expected: As steel plate and ship engine prices
have come off over the past two quarters, COSCO will be forced to mark to
market its inventory. Given prices have dropped 30–40%, we estimate a writedown
of S$118m, which would lead to a 27% drop in net profits vs. 2007. We
suspect this is the main reason behind COSCO’s profit warning on 30
December 2008.

Valuation not compelling yet: Assuming the write-down, the stock is trading
at 8.6x FY08, with marginal growth in FY09; this suggests the stock is still
expensive. Even without any write-down, the stock is trading at 6.7x FY08,
with negative earnings growth likely over the next year, not to mention a
significant drop in newbuilding order wins.

Earnings revision
FY08E and FY09E EPS have been reduced by 18.7% and 8.2%, respectively,
while FY10 EPS has been raised by 29.9% to reflect deferred profit
recognition.

12-month price target: S$0.65 based on a DCF methodology.