- 3Q14 PATMI of SGD7.1m (+69.2% YoY, -50.0% QoQ) missed expectations due to margin shortfall.
- Gross margins of 4.9% the lowest in history. Cut FY14E-16E EPS by 23-77%.
- Reiterate SELL. TP cut to SGD0.54 from SGD0.67, now at 0.9x FY15E P/BV, -1SD of 10-year mean.
3Q14 PATMI of SGD7.1m (+69.2% YoY, -50.0% QoQ) missed consensus and our expectations. 9M14 PATMI rose 31.0% YoY to SGD34.1m toform only 67% of both FY14E. This was due to weak 3Q14 gross margins of only 4.9% (2Q14: 8.0%, 3Q13: 7.4%), the lowest in its history. Cosco cited the execution of multiple first-time orders, lower-priced shipbuilding contracts and labour costs which rose c.5% YoY.
2015 could be difficult year
We believe 2015 would be a more difficult year for Cosco which has failed to improve in its execution. Higher labour, raw-material and interest costs, dovetailing with lower-priced contracts, could further sap its margins. Problems have also surfaced in three contracts worth USD1.3b: 1) the Octabuoy semi-sub hull and topside built for ATP UK is up for sale due to default by the client;2) a DP3 drillship has been terminated by client on grounds of delay; and 3) deferment of the delivery of a drillship built for Sevan Drilling on mutual grounds. Cosco would not disclose uncollected payments but we see provisions for these contracts if they cannot be sold to cover its incurred costs or booked profits, if any.
We cut FY14E-16E EPS by 23-77% for lower gross margins, now assumed at 7.0/6.2/6.7% from 9.5/9.2/10.2%. TP has also been cut to SGD0.54, or 0.9x FY15E P/BV, -1SD of its 10-year mean. It was previously SGD0.67, at 1.1x trough P/BV. Reiterate SELL given a deteriorating outlook, high net gearing of 1.2x and negative operating cashflow
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