OCBC Investment 2015-08-03: COSCO Corp - 2Q15 Results. Net gearing of 1.8x. Maintain SELL.

COSCO Corp: Net gearing of 1.8x

 Net loss in 2Q15

 Continues to make provisions

 Bank support critical

COSCO Corp reported a 26% YoY fall in revenue to S$853.5m but saw a net loss of S$4.8m in 2Q15 compared to net profit of S$14.3m a year ago.
For the half year, revenue dropped 16% to S$1.8b, with a net loss of S$4.0m vs net profit of S$26.9m in 1H14.
Results were below ours and the street’s expectations; we were forecasting full year net profit of S$15.4m while the street was going for S$33.4m.
Gross profit margin was 6.9% in 2Q15 vs 8.0% in 2Q14.

In FY14, there was a S$124.5m write-down of inventories, S$61.7m allowance for construction contracts, and S$25.8m impairment of trade and other receivables.
In comparison, the group has so far this year written down S$5.7m of inventories, made S$35.8m worth of provisions for construction contracts, and impaired S$0.3m of trade and other receivables.
With a project undergoing arbitration (DP3 Deepwater Drillship) and others at risk of cancellation, there could be more provisions or impairments ahead for the group.
This is in addition to execution hiccups that may occur as COSCO scales the offshore learning curve.

For the past six years, COSCO has been seeing negative operating cash flow each year – the business has essentially been propped up by bank loans.
The group’s net gearing has also increased to 1.8x as at end 2Q15, compared to 1.6x in 1Q15 and 1.2x in 2Q14.
Though COSCO’s gross order book stood at US$8.1b as at end 2Q15, operating margins are likely to fall as the group executes projects that were secured at low contract values.
In addition, the order book is subject to heightened risks of deferments and cancellations under the current difficult operating environment.
We cut our earnings estimates and maintain SELL with a lower fair value estimate of S$0.37 (based on P/B of 0.6x).

Analyst: Low Pei Han

Source: http://www.ocbcresearch.com/