DBS Equity Research: Wired Daily 14 Dec 2015

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Publish date: Mon, 14 Dec 2015, 12:55 PM

Cosco Corp - Privatization angle fades, expects 4Q loss, TP lowered to $0.32

STI - 2825 unable to hold up, next immediate support at 2790

US markets fell ahead of the FOMC meeting this week that is likely to see the FED initiate the next rate hike cycle, the first time in more than 10 years. Consensus expects a 72% chance that rates will go up (source: Bloomberg). Energy stocks led declines as oil price slipped further beneath the USD40pbl mark on supply concerns. Banks tumbled after as the yield on the U.S. 10-Year Treasury note had its steepest drop since September.

Last week's decline does not come as a surprise. We had highlighted a potential decline in the S&P500 to 2000 followed by 1940 (refer to Wired Weekly dated 30 November). 3 out of 3 previous US rate hike cycles, the S&P500 Index fell within the initial 2-3 months following the initial rate hike. The average decline was 7.6%. We expect volatility to continue over the next 2-3 months if the FED does hike rates later this week.

Beyond the initial rate hike, attention will turn to how quickly rates are expected to go up. Consensus currently sees FED funds rate heading to 1% by end 2016. DBS Bank chief economist expects a faster pace; rising 25bps per calendar quarter that lifts rates to 1.5% by end 2016.

STI is likely to challenge the short-term support of 2825 today. The next technical level below this is 2790.

Cosco's shares will resume trading this morning. The Stateowned Assets Supervision and Administration Commission of the State Council of China have given its in-principle approval for the proposed restructuring of China Ocean Shipping (Group) Company and China Shipping (Group) Company. The restructuring will not involve Cosco's business segments for the time being. Our analyst says this is a disappointing as privatization angle was one of the key catalysts for our HOLD call. We expect price weakness post lifting of suspension as share price has been "held up" by the suspension over the past 3-4 months. Cosco is expected to report another quarter of losses in 4Q. Our TP is lowered to S$0.32 (Prev S$0.42), as we lower our valuation multiple from 0.8x to 0.6x FY16 PB in view of the widened losses and deteriorated outlook.

Vard Promar SA, which is a 50.5% subsidiary Vard Holdings, received a cancellation notice from Petrobras Transportes SA (Transpetro) on 2 LPG carriers. The cancelled vessels are the last 2 of a US$536mil eight-vessel order placed in June 2010 for delivery between 2014 and 2016. According to Vard, construction of the two vessels was at a "very early stage". Vard said it is currently reviewing its overall exposure to the Brazilian market. The termination, if effective, is expected to reduce the company's overall exposure. At the same time, the company intends to claim compensation from Transpetro for damages in relation to the terminated contracts.

Source: DBS

COSCO SHP SG (F83)

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