Price Target: 12-month S$0.83
Drillship saga's aftermath
• 3Q13 results may reflect reversal and provision for drillship contract termination
• Striving to be the top offshore yard in China
• Earnings recovery to take time
• Maintain HOLD; S$0.83 TP
3Q earnings could be swung by drillship provision. We expect Cosco to report a recurring net profit of S$16m in its upcoming 3Q results due on 5th Nov (after market), assuming a forex loss of S$5m resulting from RMB strengthening against USD. However, we reckon earnings could be affected by the potential reversal of profits previously recognised on the project (but likely to be minimal), and adjustment/provision for the termination of drillship contract.
Zooming in on offshore. YTD, Cosco has secured US$2.2bn of new orders, exceeding our expectations of US$2bn. We will fine-tune our order win assumption and earnings post-3Q results. Cosco targets new orders of at least US$2bn a year to replenish its orderbook, of which almost 90% is expected to come from offshore projects. Besides the key Nantong and Qidong yards which handle more sophisticated offshore projects, the other three yards, i.e. Dalian, Zhousan and Guangzhjou have also scaled their uptake on offshore projects, especially offshore support vessels (OSVs). That said, Cosco is transforming into an offshore-focused Group in the long run.
Maintain HOLD; TP S$0.83, pegged to 1.4x FY14 P/BV. While we are optimistic that Cosco will emerge as a competitive offshore yard in China in another cycle or two as it gains experience in various offshore products, earnings recovery will take time as it moves up the value chain gradually. We prefer Yangzijiang as a purer play to ride the shipbuilding recovery, and Keppel Corp as the global leader in the offshore space.
Publish date: 01/11/13