FULLY VALUED S$0.790
STI : 3,205.54
(Downgrade from HOLD)
Price Target : 12-month S$ 0.76 (Prev S$0.83)
Dragged by cost overruns
• 3Q13 below on massive provision for cost overruns
• Earnings disappointment and overhang from drillship legal case may pressure share price
• Downgrade to FULLY VALUED, TP cut to S$0.76
2Q13 below due to forex loss Worst quarter since 2008. Cosco’s 3Q13 net profit plunged 84% y-o-y and 65% q-o-q to a mere S$4.2m, a far cry from our and consensus expectations of S$16-20m.
This is the worst quarter since the loss-making set of results in 4Q08. Key culprit was the massive provision for project cost overruns amounting to S$33.9m. Cosco has also written down S$15.8m of inventory but this was offset by compensation of S$13.2m received from a customer. Overall gross and EBIT margins drifted lower to 7.4% (-4.9ppts y-o-y, -3.4ppts q-o-q) and 4.0% (-3.3ppts y-o-y and - 0.1ppts q-o-q). 9M13 earnings only made up 47% of our initial below consensus full year estimate.
Overhang from Drillship saga. Cosco has secured orders of US$2.2bn YTD, with orderbook inching up from US$6.7bn last quarter to US$7.2bn currently. Cosco has reportedly signed contracts for two drillships worth US$650-700m each with X-Drill but these have yet to be effective, probably pending financing. While order win momentum has been encouraging, we believe attention will switch to earnings delivery and potential financial impact from the drillship saga in the near term. We are unable to ascertain the expected cost overrun of the drillship project and provision that has been made thus far. In the results announcement, company stated that “it is difficult to quantify the eventual financial impact of the arbitration at this point”.
Still a long way to go. We have slashed our below consensus FY13F/14F earnings by a further 31%/23% to account for the provisions for cost overruns, leading to EBIT margins falling by 0.9ppts/0.5ppts. Our TP is reduced to S$0.76, on lower valuation multiple of 1.3x FY14 P/BV (1.4x previously). Downgrade to FULLY VALUED. We reckon the earnings disappointment and overhang from Drillship saga will take a toll on share price performance in the near term. The company will have to showcase its strong ability to win contracts and improve project execution, and translate its robust orderbook into decent earnings and margins to regain our confidence.
Publish date: 06/11/13