FULLY VALUED S$0.745;
Hit by forex loss;
Price Target : 12-month S$ 0.75;
•2Q13 below due to forex loss
•Secured US$270m new contracts
•Concerns over execution of diversified vessel types and competitive pricing
• Maintain FULLY VALUED, S$0.75 TP
2Q below. Cosco’s 2Q13 net profit grew 24% q-o-q to S$12m, but fell short of our expectations of S$15-20m due to forex loss of S$10.2m Overall gross margin held up at 10.8%, attributable to Cosco's improved efficiency and lower steel cost, offsetting the lower newbuild prices. Shipbuilding and rigbuilding margins are hovering at 7-9% while repair and conversion jobs have returned higher margins of 15%. 1H13 earnings only make up 35% of our initial full year estimate.
Under pressure to fill yard capacity. Including the jack up and PSV orders announced together with the results, Cosco has secured orders of US$1.2bn YTD, forming 60% of our order win assumption of US$2bn. Upstream reported in early June that Cosco is signing contracts for two drillships worth US$650-700m each with X-Drill. If this materialises, Cosco would beat consensus' order win assumptions for this year. Cosco remains under pressure to fill up yard capacity in view of its dwindling orderbook. While its key offshore hub, Nantong yard has scaled up over the years, both Zhousan and Dalian yards, which were engaged largely in the construction of dry bulk vessels, face higher execution risk as they diversify into other vessel types in view of lackluster merchant ship orders.
Low earnings visibility. We have lowered our below consensus FY13F earnings by a further 12% to account for the forex loss. Our TP of S$0.75 is unchanged as we pegged the valuation to 1.3x FY13 P/BV, against its low ROE of 5%. Maintain FULLY VALUED. We believe the low economies of scale, weak shipping market and intense competition will continue to be a drag on earnings over the next 2 years.
Publish date: 02/08/13