Thursday, 7 August 2014

Cosco Corp

Kim Eng on 4 Aug 2014

  • 2Q14 PATMI of SGD14.3m (+18.8% YoY, +13.3% QoQ) in line.
  • Cut FY14E order wins from USD2.0b to USD1.5b to reflect tepid offshore and shipbuilding outlook.
  • Maintain SELL with TP trimmed to SGD0.67 from SGD0.68, pegged to trough P/BV of 1.1x.
No surprises
2Q14 PATMI of SGD14.3m (+18.8% YoY, +13.3% QoQ) met expectations. On the back of higher shipyard revenue, 1H14 PATMI rose 23.6% YoY to SGD26.9m, making up 51% of our FY14E and 52% of consensus forecasts. There was also a provision of SGD12.9m for inventory write-downs in 2Q14.
Management turned more pessimistic
2Q14 gross margin dipped QoQ to 8.0% (1Q14: 9.2%, 2Q13: 10.8%). Were it not for lower depreciation from a revision in policy, gross margin would have been closer to 7.3%. Margins should remain under pressure from wages, raw material prices, competition, financing costs and CNY strength.
Management appears more pessimistic on new orders than a quarter ago but keeps its USD2.0b target. Cosco has secured USD821m of new orders YTD, with orderbook at USD8.1b as at end-2Q14. Our initial assumption of USD2.0b new orders for this year seems a tall task. We cut this to USD1.5b. Net gearing also climbed to 1.18x from 1.06x a quarter ago.
As a result, our FY14E-16E forecasts have been lowered by 3-8%. TP is trimmed to SGD0.67 from SGD0.68, pegged to 1.1x FY15E P/BV, its trough valuation. No near-term catalysts in sight. Maintain SELL.

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