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 

Net loss of S$4.8m in 2Q15 

  • 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. 

Less inventory write-downs, but still provisions for contracts 

  • 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. 

Surviving on bank loans 

  • 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/