2013 is looking to be the weakest year in terms of earnings for COSCO Corp (Singapore). After recording net profit of S$139.7m and S$105.7m in FY11 and FY12, respectively, net profit for FY13 looks set to be below S$50m. Indeed, after five quarters of either little cost overruns or reversal of provisions made earlier, COSCO returned to making provisions on its construction contracts again, dousing hopes that it is gaining footing on the execution front. Looking ahead, we expect the operating environment for the group to remain difficult. Any credit tightening in China may also affect the ability of customers to meet their financial obligations. Maintain SELL with S$0.61 fair value estimate.
2013 – a year to forget
2013 is looking to be the weakest year in terms of earnings for COSCO Corp (Singapore). After recording net profit of S$139.7m and S$105.7m in FY11 and FY12, respectively, net profit for FY13 looks set to be below S$50m. Indeed, after five quarters of either little cost overruns or reversal of provisions made earlier, COSCO returned to making provisions on its construction contracts again, dousing hopes that it is gaining footing on the execution front. For 4Q13, the group may even have to reverse profits on its “substantially completed” drillship that is mired in arbitration proceedings with customer Dalian Deepwater Development, unless COSCO is able to quickly find another buyer for its drillship.
2014 – also looks challenging
Looking ahead, we expect the operating environment for the group to remain difficult. The oversupply of yard capacity in China continues to roil the shipbuilding industry. Outlook for the offshore industry is more positive, but COSCO – being a new entrant – may not be able to secure many good quality contracts, and the fact that it is executing a wide range of products that are new to the company means that margins remain vulnerable to execution risk.
Headwinds remain; maintain SELL
As of 30 Sep 2013, the group’s order-book stood at US$7.2b with progressive deliveries up to 2015. However, many orders are likely to be executed at low margins. Though the group has a cash level of S$1.7b, it also has S$1.85b worth of debt maturing in a year (36% of which is secured and may be rolled over), not forgetting the substantial working capital that the group needs with its back-end loaded payments for its contracts. Moreover, any credit tightening in China may affect the ability of customers to meet their financial obligations. Maintain SELL with S$0.61 fair value estimate.
2013 is looking to be the weakest year in terms of earnings for COSCO Corp (Singapore). After recording net profit of S$139.7m and S$105.7m in FY11 and FY12, respectively, net profit for FY13 looks set to be below S$50m. Indeed, after five quarters of either little cost overruns or reversal of provisions made earlier, COSCO returned to making provisions on its construction contracts again, dousing hopes that it is gaining footing on the execution front. For 4Q13, the group may even have to reverse profits on its “substantially completed” drillship that is mired in arbitration proceedings with customer Dalian Deepwater Development, unless COSCO is able to quickly find another buyer for its drillship.
2014 – also looks challenging
Looking ahead, we expect the operating environment for the group to remain difficult. The oversupply of yard capacity in China continues to roil the shipbuilding industry. Outlook for the offshore industry is more positive, but COSCO – being a new entrant – may not be able to secure many good quality contracts, and the fact that it is executing a wide range of products that are new to the company means that margins remain vulnerable to execution risk.
Headwinds remain; maintain SELL
As of 30 Sep 2013, the group’s order-book stood at US$7.2b with progressive deliveries up to 2015. However, many orders are likely to be executed at low margins. Though the group has a cash level of S$1.7b, it also has S$1.85b worth of debt maturing in a year (36% of which is secured and may be rolled over), not forgetting the substantial working capital that the group needs with its back-end loaded payments for its contracts. Moreover, any credit tightening in China may affect the ability of customers to meet their financial obligations. Maintain SELL with S$0.61 fair value estimate.
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