Cosco Shipping International (Singapore) - DBS Research 2022-04-29: Watch For Inorganic Growth

• Cosco Shipping's Share Price currently trades at 0.9x FY22F P/B, 1 standard deviation below its 5-year mean, which is fairly valued given a projected FY22F ROE of 4.1% and a peer average P/B of 1.0x against an average ROE of 7.0%.

Cosco Shipping International (Singapore) - Company Background & History

• Founded in 1961 and headquartered in Singapore, COSCO SHIPPING International (Singapore) Co., Ltd. aims to become the leading integrated logistics service provider in South and Southeast Asia for comprehensive services across the entire logistics value chain. It is also involved in property management, as well as ship repair and marine engineering through various subsidiaries.
• Formerly known as COSCO Corporation (Singapore) Limited, it operated one of the largest ship repair, shipbuilding, marine engineering, and dry bulk shipping outfits in China and Singapore. However, it divested its loss-making shipyard business in 2017 as part of a company-wide restructuring due to highly challenging market conditions. It then went on to acquire Cogent (SGX:KJ9), one of Singapore’s leading full-service logistics service providers with a track record of over 40 years, in 2018.
• The company was renamed to COSCO SHIPPING International (Singapore) and shifted its focus to the core logistics business, which has operations in Singapore, Malaysia, Indonesia, and Vietnam.
• With the 60% disposal of its equity interest in COSCO SHIPPING (Singapore) in December 2021, the company will generate revenue from three main business segments now:
  1. Logistics;
  2. property management; and
  3. ship repair and marine engineering.
• Cosco Shipping International (Singapore) is ultimately controlled by the parent company, COSCO SHIPPING Corporation Limited, a state-owned enterprise established in the People’s Republic of China and China’s largest shipping group and one of the top shipping conglomerates in the world.
• We believe Cosco Shipping International (Singapore) is a HOLD at the current prices. Our target price is pegged to 1.0x FY22F P/B, which is slightly less than 1 standard deviation below its 5-year mean. We have also cross-checked our valuation using the Discounted Cash Flow (DCF) valuation method, which yields a similar value of S$0.24.

Cosco Shipping International (Singapore)'s business segments

• Cosco Shipping International (Singapore) operates 3 business segments – logistics, property management, and ship repair and marine engineering. Its wholly owned subsidiary Cogent (SGX:KJ9), a one-stop logistics service provider, offers warehousing solutions, container depot services, automotive logistics services, and transportation services.
  • The logistics segment contributes ~70% to total revenue from FY18- 21.
  • Under property management, Cogent also manages The Grandstand, one of the largest shopping and lifestyle hubs in Singapore, while its other subsidiary, Harington Property, owns office units in Suntec City.
  • Ship repair and marine engineering activities include fabrication work services and production of marine outfitting components.

Cosco Shipping International (Singapore)'s Investment Summary

Growth in FY22F revenue will be more than offset by the partial disposal of the shipping company.

• Our FY22F top-line revenue projection for Cosco Shipping International (Singapore) falls slightly, by 1.4% y-o-y to S$195.7m from S$198.5m in FY21, despite growth in the remaining three business segments, as the shipping segment is now equity-accounted as an associate (40% stake). In FY21, the shipping segment contributed S$27.4m to revenue.

Tapering of government support measures to impact profitability.

• Cosco Shipping International (Singapore) received S$12.4m in government grants in FY20 and S$4.9m in FY21 under the Jobs Support Scheme (JSS), COVID-19-related rent concessions, etc. We expect this to taper further into FY22F and FY23F, given the improving pandemic situation in Singapore. Hence, we forecast that the company would receive only ~S$3m and ~S$2m in government grants in FY22F and FY23F, respectively, thereby weighing on earnings.

Key competitive edge lies in its position as one of Singapore’s largest one-stop logistics services providers.

• The Cogent 1.Logistics Hub consolidates its full suite of logistics operations – warehousing, container depot, automotive logistics, and transport management – within one facility.
• The hub has a Gross Floor Area (GFA) of ~1.6m sqft, comprising warehouse space purpose-built to store NEA- controlled, flammable materials and cargo, as well as a patented rooftop container depot capable of storing 16,000 TEUs of empty containers. It is also strategically located close to Jurong Port and Jurong Island to facilitate quicker and smoother transportation.
• 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.

Cogent’s warehouses operating above optimal capacity, but an upside to earnings could come from acquisitions.

• The occupancy levels at the warehousing facilities are currently ~85%-100% on average, which is above the optimal level. The company has not announced any expansion plans, although the management has shared that 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.
• The company is well positioned for inorganic growth, given its strong balance sheet with S$100m in cash and 0.44x net debt-to-equity in FY21.

Outlook on warehousing in Singapore looks positive.

• Singapore is a major logistics hub, ranked first in the world for logistics competence and timeliness of services, and second in Asia on the World Bank's Logistics Performance Index 2018. According to JTC, the occupancy rate for the warehouse segment stood at 90.0% for 4Q21, while rents grew 2.7% y-o-y.
• Going forward, demand for warehousing space in Singapore should be robust, in line with the economic recovery in 2022 and the continued expansion in the logistics sector. Coupled with the low supply of warehousing spaces that are coming onstream, overall warehouse occupancy and rental rates are expected to remain firm.
• Further, Singapore is one of the top oil trading and refining hubs in the world and Cogent has capabilities to support the OPEC industry. Hence, we should see continued demand from Cogent’s petrochemical customers.

Property management prospects uncertain after 2023.

• Cogent manages The Grandstand, a one million sqft shopping and lifestyle hub located at Bukit Timah, which makes up the majority of property management segment revenue. In FY21, this segment contributed S$12.5m, ~6% of total revenue. Prospects are uncertain after the final extension of the lease expires on 31 December 2023, as the company has not announced any continuity plans.

Ship repair and marine engineering segment to remain stable.

• Cosco Shipping International (Singapore) has expanded its operations beyond Singapore, Malaysia, and Indonesia to also Philippines, Vietnam, Thailand, Sri Lanka, India, and Bangladesh. Revenue from ship repair and marine engineering increased by 18% y-o-y to $12.6m, mainly due to higher revenue from ship repair and fabrication works, and we expect stable growth in this segment.

No dividend payouts for the last seven years.

• Cosco Shipping International (Singapore) does not have a specific dividend policy. No dividends have been declared since the last dividend payout in 2014. Management shared that as they are currently evaluating strategic moves to expand the business, they are not paying out dividends to shareholders.

Cosco Shipping International (Singapore)'s key risks

• Supply chain disruption. The global supply chain continues to be extremely vulnerable to COVID-19 outbreaks or any other disruptions.
• Increase in fuel costs. Any significant increase in fuel prices will lead to an increase in costs for Cosco Shipping International (Singapore), given that the logistics business is transportation heavy and fuel intensive.
• Leasehold land expiry. Non-renewals or termination of land leases could be a risk to the long-term usage of the land.
• Interest rate risks. With only 32% of debt fixed, Cosco Shipping International (Singapore) will be subject to higher interest rates for a large portion of its borrowings.

Cosco Shipping International (Singapore)'s valuation & peer comparison

• We derived target price of S$0.26 for Cosco Shipping International (Singapore) based on P/B valuation.
• Cosco Shipping's Share Price currently trades at 0.9x FY22F P/B, 1 standard deviation below its 5-year average of 1.3x, which is fairly valued. Our target price for Cosco Shipping is based on the FY22F P/B of 1.0x, which is slightly less than 1 standard deviation below the 5-year average, against a projected FY22F ROE of 4.1%.
• Cosco Shipping's Share Price trades at a premium compared to its peers. Peers’ average P/B stands at 1.0x against an average ROE of 7.0%, while Cosco Shipping International (Singapore)’s current P/B is at 0.9x and our target price represents FY22F P/B of 1.0x projected against FY22F ROE of 4.1%.