We doubt that any institutional investors would get excited over Cosco’s impressive order wins of US$3bn YTD, as these may not translate into higher profitability given its patchy execution record.
After five consecutive quarters of provision write-backs, which offered hope that its operations might stabilise, Cosco‟s recent provision of S$49.7m in 3Q13 reminded us that redemption could still be a long way off. De-rating catalysts are expected from persistently weak execution. Under our new rating structure, our rating changes from Underperform to Reduce. Our target price remains based on 22x CY15 P/E (five-year mean).
Cosco has secured orders of about US$3bn YTD, with its order book climbing to about US$7.9bn from US$6.7bn in 2Q13. Although this momentum is encouraging, we are uncertain whether the contracts would be profitable as most of its offshore contracts are priced at 20% discounts to the rates commanded by its Singapore peers. For instance, its latest jack-up rig order secured in Oct 13 was priced at US$180m vs. Singapore‟s average rig price of US$220m.
We believe that Cosco‟s 4Q results could be uglier, owing to a potential reversal of profits from the cancellation of a drillship order by a customer. The cancellation is now under arbitration and Cosco is still unable to quantify the financial impact. However, we believe that the profits booked earlier for this drillship could be reversed in 4Q, in line with conservative accounting standards. Upside risks to our view include a successful sale of the drillship. The unit is undergoing sea trials and Cosco says it has received several enquiries for the vessel.
No reason to own the stock
We recommend investors to reduce their positions in the stock in view of the negative triggers expected in 4Q. While the company may „buy‟ contracts by lowering profitability, that would not buy it any favours from the market.
Publish date: 29/11/13