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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