Cosco Pacific (1199), which leases containers to shippers and operates ports, was a major mover last week. The firm has benefited from indications that shipping trade flows are rising.
Ken He (DBS Vickers) says the catalyst for last week's rally was favourable purchasing managers index (PMI) data coming from the mainland and the US, indicating manufacturing orders are on the rise. PMI is a leading indicator of trade flows, and of demand for container leasing and port services.
While the container shipping sector remains under cloud due to a glut of ships, the outlook for profits from container leasing (of which Cosco Pacific derives about 70 per cent of its earnings) is favourable.
'Cosco Pacific is undervalued,' says He, noting that the share price is trading at 0.8 times price-to-book (a common pricing measure used in the shipping sector). 'The current valuation is close to the trough valuation in late 2008. We think it's unjustified because the company's earnings outlook is still quite firm.'
He says firms offering container leasing and port services should be outpacing shipping companies given that traffic is robust.
'We expect container trade to grow [in 2012/13] albeit at a slower pace,' He says. 'Earnings will continue to rise in 2012 and 2013 so it does not make sense for the [Cosco Pacific's] share price to drop with shipping lines'.'