Saturday, May 9, 2009

COSCO fully valued - DBS

DBS Vickers released this research report on COSCO:

Still in the doldrums

• 1Q09 net profits plunged 60% to S$33.2m, below expectation. Adjusting for fair value losses on
forward currency contracts, the fall in net profits narrowed to -37% to S$52.9m.
• Shipbuilding in the red due to poor execution, low margins and forex losses.
• Key risks: contract cancellations, shipowners negotiating for discount on newbuild contract prices on vessel delivery, deferment of vessel deliveries, deferment of payments, sliding BDI.
• Maintain Fully Valued, its PE at 15.7x is the highest in the sector, despite earnings plunge and its order book at risk.

Shipyard net profit contributions plunged two-thirds to S$16m, below expectations. 1Q09 net earnings accounted for 18% of our forecasts and 15% of street estimates. While sales were flat at S$714.4m, net profit plunged 60% yoy to S$33.2m on lower margins across Shipping and Shipyard operations. Key disappointments came from Cosco Shipyard Group which was hit by : (1) weak execution on shipbuilding contracts, leading to slow recognition of its order book, (2) fair value Losses on forward currency contracts of S$39m, (3) lower margins from shipbuilding, shiprepair divisions. Adjusting for forex losses, net profit decline would be smaller at 37%.

Shipping earnings fell 54% on rate decline. Average day rates fell 26% to US$26k/day, although this is higher than our forecasts of US$15k, as 8 of its 12 vessels were trading on time charter contracts. However, the plunge in spot rates implies that shipping earnings will decline sequentially going forward, as 7 charter contracts have expired by early May 09 and 3 more will expire by Aug 09.

Most expensive marine stock - maintain Fully Valued. Valuations are demanding at 15.7x FY09 EPS for a stock facing order book risks and execution problems yet to be resolved at its yard. We cut our EPS by 7% for FY09 to adjust for lower margins at CSG.

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