COSCO Corp

OCBC on 9 May 2012

COSCO Corp Singapore (COSCO)’s 1Q12 results were largely within our expectations but below the street’s. Revenue decreased by 3% YoY to S$979m, while net profit attributable to shareholders fell 21% YoY to S$27.8m. Gross margin declined by one percentage point to 10.1% (1Q11: 11.1%) on stiffer competition but operating costs remains largely stable. Finance cost increased by 168% YoY to S$21.8m (1Q11: S$8.1m) due to higher gearing and increased borrowing costs. Order-book remained stable at US$5.8b (end-Dec-11: US$6.1b). Maintain HOLD with unchanged fair value estimate of S$0.98.

1Q results within expectations
COSCO Corp Singapore (COSCO)’s 1Q12 results were largely within our expectations but below the street’s. Revenue decreased by 3% YoY to S$979m, while net profit attributable to shareholders fell 21% YoY to S$27.8m. Gross margin declined by one percentage point to 10.1% (1Q11: 11.1%) on stiffer competition but operating costs remains largely stable. Finance cost increased by 168% YoY to S$21.8m (1Q11: S$8.1m) due to higher gearing and increased borrowing costs.

Weakness in ship-building and ship repair
1Q revenue from shipyard operations fell by 2.5% YoY to S$965.9m mainly due to weaker contributions from the ship repair and shipbuilding segments (but partially offset by growth in the offshore segment). COSCO explained that more Chinese yards are now taking on repair work to compensate for the lack of shipbuilding orders. Consequently, pricing has become very competitive. We estimate that gross margin for repair work has now fallen to 8-9% (from 10-15% previously).

Strengthening the offshore segment
Although COSCO had booked S$13.8m of expected losses mainly from offshore construction contracts, the group appears to be more optimistic about the offshore segment. Management said that there are a number of orders in the market, but it would only want to focus on those contracts that will enable them to earn a good margin in the future. In addition, COSCO is now able to negotiate for better payment terms, i.e. 30% downpayment / 70% on delivery (previously: 20/80).

Increased borrowing
During the quarter, COSCO’s total borrowing increased by S$622m to S$2.8b mainly to fund working capital requirements for its construction contracts. Its order-book remained largely unchanged at US$5.8b as of end Mar-12 (end-Dec 2011: US$6.1b). Maintain HOLD with unchanged fair value estimate of S$0.98.