COSCO Corp reported a 2.3% YoY rise in revenue to S$915.8m but saw a net loss of S$13.2m in 4Q14 compared to net profit of S$4.6m a year ago. For the full year, revenue rose 21% to S$4.26b but net profit was a paltry S$20.9m, a 32% fall from FY13’s already poor showing. For the past six years, COSCO has been seeing negative operating cash flow each year – the business has essentially been propped up by bank loans. With a net gearing of 1.5x amidst a slowing offshore market, bank support has never been more critical. Execution also remains wanting to date. Lowering our P/B from 0.8x to 0.7x, our fair value estimate drops from S$0.50 to S$0.43. Maintain SELL.
Hitting a new low
COSCO Corp reported a 2.3% YoY rise in revenue to S$915.8m but saw a net loss of S$13.2m in 4Q14 compared to net profit of S$4.6m a year ago. For the full year, revenue rose 21% to S$4.26b but net profit was a paltry S$20.9m, a 32% fall from FY13’s already poor showing. Gross profit margin was 6.8% in FY14 vs 9.2% in FY13, while net profit margin was 0.5% in FY14 vs 0.9% in FY13.
Seeing the bottom for impairments yet?
In FY14, there was a S$124.5m write-down of inventories, S$61.7m allowance for construction contracts, and S$25.8m impairment of trade and other receivables. With a project undergoing arbitration and another one at risk of cancellation, there could be more provisions or impairments ahead for the group. This is in addition to execution hiccups that may occur as COSCO scales the offshore learning curve.
Surviving on bank loans
For the past six years, COSCO has been seeing negative operating cash flow each year – the business has essentially been propped up by bank loans. So far three (Guangdong, Dalian, Zhoushan) of the group’s six major yards have made it to the Chinese government’s white list of yards and are expected to enjoy financial support from local banks. It is unclear if more yards will be added to the list; if COSCO’s remaining yards are not added, there could be a reduction in bank support for the group.
Remains a risky proposition
As at 31 Dec 2014, the group’s gross order book stood at US$8.4b, with progressive deliveries up to 2017. However, as the group continues to execute projects that were secured in recent years “at low contract values”, it expects operating margins on these new shipbuilding projects to face downward pressure. This does not augur well for a company with a net gearing of 1.5x (vs. 0.7x in 4Q12 and 0.8x in 4Q13) amidst a slowing offshore market. Lowering our P/B from 0.8x to 0.7x, our fair value estimate drops from S$0.50 to S$0.43. Maintain SELL.
COSCO Corp reported a 2.3% YoY rise in revenue to S$915.8m but saw a net loss of S$13.2m in 4Q14 compared to net profit of S$4.6m a year ago. For the full year, revenue rose 21% to S$4.26b but net profit was a paltry S$20.9m, a 32% fall from FY13’s already poor showing. Gross profit margin was 6.8% in FY14 vs 9.2% in FY13, while net profit margin was 0.5% in FY14 vs 0.9% in FY13.
Seeing the bottom for impairments yet?
In FY14, there was a S$124.5m write-down of inventories, S$61.7m allowance for construction contracts, and S$25.8m impairment of trade and other receivables. With a project undergoing arbitration and another one at risk of cancellation, there could be more provisions or impairments ahead for the group. This is in addition to execution hiccups that may occur as COSCO scales the offshore learning curve.
Surviving on bank loans
For the past six years, COSCO has been seeing negative operating cash flow each year – the business has essentially been propped up by bank loans. So far three (Guangdong, Dalian, Zhoushan) of the group’s six major yards have made it to the Chinese government’s white list of yards and are expected to enjoy financial support from local banks. It is unclear if more yards will be added to the list; if COSCO’s remaining yards are not added, there could be a reduction in bank support for the group.
Remains a risky proposition
As at 31 Dec 2014, the group’s gross order book stood at US$8.4b, with progressive deliveries up to 2017. However, as the group continues to execute projects that were secured in recent years “at low contract values”, it expects operating margins on these new shipbuilding projects to face downward pressure. This does not augur well for a company with a net gearing of 1.5x (vs. 0.7x in 4Q12 and 0.8x in 4Q13) amidst a slowing offshore market. Lowering our P/B from 0.8x to 0.7x, our fair value estimate drops from S$0.50 to S$0.43. Maintain SELL.
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