Cosco Corp

Kim Eng on 9 May 2012

Results in line, maintain SELL. 1Q12 results were generally within expectations with revenue dipping by 3% YoY to SGD978.7m while net profit took a sharper plunge of 25% YoY to SGD27.8m. Revenue for shipyard operations declined due to lower recognition while dry bulk shipping business suffered from lower charter-hire rates. Margins continued to be under pressure with current quarter’s gross margin at 10.1% compared to 11.1% a year ago. With a gloomy outlook ahead, we maintain our SELL recommendation with target price of SGD0.75.

Orderbook. Cosco has delivered 14 bulk carriers and two offshore vessels YTD. It expects to deliver another 21 vessels in FY12. Outstanding orderbook stood at USD5.8b as at 1Q12 with progressive deliveries stretching up to FY14. Its orderbook consists of 47 bulk carriers, four special purpose carriers and several offshore vessels.

USD2.4b new orders to sustain its yards. To date, it has secured about USD1.0b in new orders. We are forecasting about USD2.4b in contract wins for FY12. This would just be sufficient to keep its yards occupied and marginally profitable while it bids its time for a turnaround in the sector and also to achieve greater efficiency in executing its offshore projects.

A difficult year ahead. The road ahead is paved with difficult challenges. (1) Low pricing and drought of orders in the shipbuilding segment with further margin compressions expected; (2) Intense competition for ship repair segment as yards in China contend for such jobs to fill empty yard capacities, in turn putting downward pressures on prices; (3) offshore projects are still barely profitable with further provision of SGD13.8m made this quarter.

Maintain SELL. We maintain our SELL recommendation with target price of SGD0.75 pegged at 1.3x P/BV, its 2009 trough level, and an implied FY12F PER of 13x. We see no respite in the near term and expect further margin pressures in FY12. Net gearing also climbed higher to 0.41x versus 0.29x a quarter ago as it took on more borrowings to finance its yard operations.