Friday, November 8, 2013

COSCO Corporation: Not turning around yet (OCBC)

COSCO Corporation:
Fair value S$0.61
add: 12m dividend forecast S$0.005
versus: Current price S$0.79
Not turning around yet

COSCO Corp (Singapore) reported a 6% YoY rise in revenue to S$989.4m but saw an 84% drop in net profit to S$4.2m in 3Q13, such that 9MFY13 net profit accounted for 53% of our full year estimate. The results also disappointed the street, as 9MFY13 net profit only made up 42% of the full year consensus figure of S$62.6m. Operating profit margin was only 1.2% in 3Q13 vs. 4.8% in 3Q12, mainly because of a S$33.9m provision for expected losses on construction contracts. A S$15.8m provision was also taken for inventory write-down. This resulted in a net profit margin of 0.4% in the quarter vs. 2.8% in 3Q12. With low earnings visibility and increasing debt-related risks, we maintain our SELL rating with a fair value estimate of S$0.61.


Yet another weak quarter
COSCO Corp (Singapore) reported a 6% YoY rise in revenue to S$989.4m but saw an 84% drop in net profit to S$4.2m in 3Q13, such that 9MFY13 net profit accounted for 53% of our full-year estimate. The results also disappointed the street, as 9MFY13 net profit only made up 42% of the full-year consensus figure of S$62.6m. Operating profit margin was only 1.2% in 3Q13 vs. 4.8% in 3Q12, mainly because of a S$33.9m provision for expected losses on construction contracts. A S$15.8m provision was also taken for inventory write-down. This resulted in a net profit margin of 0.4% in the quarter vs. 2.8% in 3Q12.

Execution still needs more work; drillship profits to be reversed?
After five quarters of either little cost overruns or reversal of provisions made earlier, COSCO returned to making provisions on its construction contracts again, dousing hopes that it is gaining footing on the execution front. For the upcoming quarter, the group may even have to reverse profits on its “substantially completed” drillship that is mired in arbitration proceedings with customer Dalian Deepwater Development (DDD), unless COSCO is able to quickly find another buyer for its drillship.

Risky investment; maintain SELL
As of 30 Sep 2013, the group’s order-book stood at US$7.2b with progressive deliveries up to 2015. Although it looks stable, many orders are likely to be executed at low margins. Though the group has a cash level of S$1.7b, it also has S$1.85b worth of debt maturing in a year (36% of which is secured and may be rolled over), not forgetting the substantial working capital that the group needs with its back-end loaded payments for its contracts. Moreover, any credit tightening in China may affect the ability of customers to meet their financial obligations. Rolling forward our valuation to FY14F estimates with an unchanged P/B of 1x, our fair value estimate rises slightly from S$0.60 to S$0.61. Maintain SELL.



Source/Extract/Excerpts/来源/转贴/摘录: OCBC-Research,
Publish date: 05/11/13

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