Cosco Corp

Kim Eng on 5 Nov 2012

Below expectations, maintain Sell. 3Q12 results were below our expectations with revenue of SGD937.0m (-3.4% YoY, -3.9% QoQ) and corresponding PATMI of SGD26.6m (-17.5% YoY, -3.8% QoQ). 9M12 net profit made up 71% of our previous full-year forecast. Cosco has been winning offshore orders but at questionable profitability. With persistent weak shipbuilding outlook, we expect stock price to languish towards lower levels. Maintain Sell and TP of SGD0.73.

Improved margins on better product mix. Overall gross margin saw a 30bps QoQ improvement to 12.3%, but this was mainly due to better product mix with higher contribution from Marine Engineering segment. The margin improvement was not significant enough to conclude an upward trend. Instead, we believe that negative price pressure could continue to reign in on ship repair, conversion and offshore projects for the Chinese shipyards due to intense competition.

Needs to replenish declining orderbooks. Orderbooks are being depleted, standing at USD5.7b currently. 31 outstanding bulk carrier orders would be delivered by end-2013 while the offshore contracts should be completed by end-2014. With YTD order secured of USD1.2b (another USD200m yet to be confirmed), Cosco remains hopeful of USD2.0b order win by year-end. We cut FY12F order win assumptions to USD1.8b Shipbuilding orders are dry but demand should come from offshore and conversion contracts although margins are expected to remain suppressed.

Concerns raised on funding needs. Current payment terms for projects are largely on a 20/80 basis (20% downpayment, 80% on delivery) and Cosco may require additional funding to finance high working capital requirements. Net gearing has risen to 0.65x and Cosco expects to shift its debt structure towards higher proportion of long-term debt but has ruled out any immediate needs for equity funding.

Valuations still rich. Stock price has retreated about 11% since our last Sell call, but we think that valuation is still rich at current levels. We cut FY12F-14F PATMI forecasts by 6-10% on weak results and our lowered order win assumptions. Maintain Sell and target price of SGD0.73, pegged at 1.3x trough P/BV.