Two steps forward, one step back
Cosco posted weaker‐than‐expected 2Q11 earnings, with net profit diving 53% YoY to $31.9m. Despite turnover staying firm, earnings were eroded by costs, as well as a $12m tax adjustment. With order outlook and execution looking weak once more, we cut our forecasts and downgrade Cosco to HOLD with target price lowered to $1.80.
Sequentially, 2Q11 net profit was even lower than that in the already weak 1Q. Gross margins declined from 11.1% to 7.5%, indicating that the improvement in execution has derailed. The situation was exacerbated by higher costs across the board. The shipyard business saw repair margins drop to single digits. Repair margins were also hurt by price competition, while shipbuilding was most keenly hit by an increase in steel and labour costs. For offshore, margins contracted as a result of cost overruns due to higher R&D costs associated with a steeper learning curve for new vessel types.
Bulk shipping was hammered by weaker rates, with the business just barely profitable. Finally, income tax rose by 74%, or a tax rate of 33%, above the group’s normal rate of 16‐20%. This was due to the one‐off impact of a $12m deferred tax adjustment. We expect this to revert back to the normal level when consolidated for the full year.
Management views the overall market as difficult and that Cosco may struggle to secure new shipbuilding orders. Also, the offshore segment is unlikely to be as profitable as other offshore stalwarts such as Keppel and SembMarine, whose margins are in the high teens. At best, Cosco will achieve just single‐digit margins for now, as the group is a relatively new entrant with no competitive niche.
Action & Recommendation
We cut our FY11F earnings by 30% and FY12F earnings by 23% on lower margins, despite Cosco’s turnover remaining healthy on its US$7.0b orderbook. Our target price is lowered to $1.80 from $2.43, based on P/B of 3.5x and FY12 PER of 18x. Downgrade to HOLD.
Source/转贴/Extract/Excerpts: Kim Eng Research