Friday, October 18, 2013

Cosco Corporation : One step forward, two steps back (CIMB)

Cosco Corporation
Current S$0.81
Target S$0.46
One step forward, two steps back

 We doubt the simultaneous string of order wins announced by Cosco, amounting to US$400m, will mask the negative impact of the termination of a contract worth more than US$500m.

Cosco’s only drillship order, due to be delivered in 3Q12, has been terminated by its owner, which is now seeking a US$110m refund. We keep our EPS estimates for now, pending more clarity regarding the arbitration and potential provision to be made. Maintain Underperform and target price based on 22x CY14 P/E (five-year mean). We see re-rating catalyst from consistent quarterly earnings.

What Happened
Cosco announced three contracts worth a total of about US$400m, with one cancellation of an order worth more than US$500m. The contracts it won are 1) the US$170m conversion of a semi-completed hull to a high-end floating accommodation unit due for delivery in 2015; 2) a US$180m jack-up rig from an Asian owner for delivery in 3Q15; and 3) Rmb325m (US$53m) for a 30,000dwt cargo & training ship. The cancelled contract is a drillship awarded in Jul 2010 to convert the hull of a vessel originally built as part of a floating production drilling storage and offloading (FDPSO) unit for MPF Corp, which sought protection from bankruptcy in 2008. The drillship owner served Cosco Dalian a notice on 5 Aug 2013 to terminate the contract on the grounds of delay in the vessel’s delivery, although the construction is mostly complete. On 5 Sep, the owner claimed a refund for the first instalment (US$110m) and other advances paid. Cosco's without prejudice proposal to settle the matter was rejected on 7 Oct. Several potential buyers have expressed interest in buying the vessel.

What We Think
YTD, the order win reached US$2.5bn. According to Riglogix, Odjfell is the drillshp’s owner and the vessel’s status is “under inspection”. Cosco could sell the vessel for US$500m (vs. about US$600m built in Korea), but the sale may prove to be a loss as it could cost Cosco more than US$500m to complete the vessel. More modifications may be required to suit the new owner's requirements. Arbitration is likely to take long to reach a settlement and we expect any provision made in this regard to wipe out its FY13 or FY14 profits.

What You Should Do
There is no reason to own the stock for now.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 18/10/13

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