Brokers' call: Cosco

COSCO

Broker: DBS Group Research

Call: Fully valued

Target price: 32 cents

Cosco's hefty gross order book of US$7.9 billion (S$11.2 billion) is a double-edged sword. The shipbuilding contracts on its orderbook are of low value while its offshore segment continues to see a steep learning curve with its diversified product range. Making things worse, its oil and gas customers are delaying rig deliveries in view of the lacklustre chartering market.

Given the weak market sentiment and abundant supply of new drilling rigs, it will be challenging for Cosco to conclude the sale of the cancelled drillship unit. Meanwhile, the fourth Sevan cylindrical rig unit, which is near completion, faces risk of cancellation as the customer has failed to secure a charter contract and Cosco is held responsible for the delivery delay.

An earlier-than-expected recovery in oil prices could catalyse an industry recovery with Cosco securing more orders at attractive prices. Sharp improvements in productivity could also cause its shares to re-rate.


OLAM INTERNATIONAL

Broker: OCBC Investment Research

Call: Hold

Target price: $1.86

The near- to-medium-term outlook for Olam and the commodities sector is still fraught with uncertainties, given the sputtering global economic growth, as well as the potential supply disruption that the current El Nino phenomenon can bring to agriculture produce.

Olam's plans to expand in Nigeria involve investments in setting up poultry and fish feed mills as well as hatcheries.

As the global animal feed industry is a large and growing part of the agri-commodity complex with attractive returns and a strong growth outlook, particularly in emerging markets, it makes sense for Olam to pursue such a move.

By going the integrated route, Olam can also capture more margins as it can tap its existing strengths like extracting raw material cost efficiencies, sharing of port infrastructure, sourcing arbitrage, trading, ocean freight and risk management. Earnings for financial year 2015 are pared by 19 per cent, and 2016 by 12 per cent.


CITY DEVELOPMENTS LTD

Broker: OCBC Investment Research

Call: Hold

Target price: $8.35

CDL announced that it would form a joint investment entity with Alpha Investment Partners to acquire three office properties valued at $1.1 billion.

Alpha and CDL will co-finance the portfolio on a 60:40 basis. This transaction provides Alpha with preferred returns up to an internal rate of return of 12.6 per cent per annum after which CDL will receive all cash flows until its capital is repaid.

CDL continues to monetise its non-core assets and strengthen its balance sheet effectively in a slowing market using its profit participation securities, which set up an attractive proposition for investment partners. Markets would likely react positively to this latest development.

Headwinds are expected in the group's core domestic development segment where conditions are challenging going forward.

A version of this article appeared in the print edition of The Straits Times on December 21, 2015, with the headline 'Brokers'Call'. Print Edition | Subscribe