Cosco Corporation: Unimpressive 1Q09 results

1Q09 results below expectations. Cosco Corporation (Cosco) released its 1Q09 results yesterday. While revenue declined marginally (0% YoY, -1% QoQ) to S$714m, PATMI (excluding gains from currency translation reserves as a result of revised FRS accounting) fell 70% YoY to S$33m. Adjusting for a loss of S$38m from forward currency contracts and a gain of S$10m from currency exchange, core operating profit would have been S$77m, below estimates of S$116m. We are turning slightly positive in our medium-term outlook, as we note of Cosco’s capability to undertake offshore conversion projects from its recent award from Modec.

Separately, we note that Cosco is finalising two other FPSO conversion projects valued at a total of US$150m. In addition, we think stabilisation in the dry bulk market is likely, considering the demand-supply conditions. Any recovery in the BDI is positive for Cosco as 1) it reduces the possibility of further cancellations, 2) increase revenue for its dry bulk shipping division as the current rates are based on spot market.

Still, near-term outlook is bleak, with more order cancellations expected… In addition, Cosco announced the cancellation of a bulk carrier order and deferment of two others from a European ship owner, bringing the total number of vessels that were cancelled to five and rescheduled to 26. We expect some cancellations from parent, Cosco Group, as HK-listed China Cosco Holdings has indicated plans to “cancel or defer” bulk carriers in its recent results’ guidance. Our forecast assumes 20% cancellations and 50% deferments.

..and 2Q09 could possibly be the worst quarter. Going forward, we remain concerned over yard execution and potential late delivery penalties as the management has once again reduced their guidance on vessel deliveries from 25 to 15 for FY09. Shipbuilding is unlikely to be profitable. Ship repair will continue to face declining contributions due to both reduced work scope per vessel and number of ships repaired. Shipping revenue is likely to fall further as previous contracts on favourable terms lapsed (Current chartering contracts are based on spot market rates and at 70% lower than previous contracts). As such, we pared down our FY09 and FY10 topline down by 7% and 3% respectively. FY09 and FY10 bottomline were reduced by 25% and 14% correspondingly as we take into account lower 1Q09 numbers, reduced margins and higher tax rates.

Recent rally signified increased risk-reward appetite, TP raised, but SELL maintained. We revise up the target price to S$0.92 (from S$0.74), more skewed toward pre-shipbuilding boom cycle PB range of 1.5x P/B, to reflect subsiding risk adverse sentiment in the market. Maintain SELL.

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