The write-down of S$38.8m pertains to foreign currency hedges that Cosco had made in relation to its ship building contracts and materials purchasing. However, this will be reversed at the turnover level as the value of these contracts is progressively recognised. Going forward, we expect this to add volatility to Cosco’s quarterly reported earnings.
Bulk shipping revenue declined 22% to S$46.2m, due to lower charter rates. The bulk of its fleet is now on short-term voyage charter, with the last 3 long-term charters expiring by August. We expect this business to remain weak, with no recovery in rates expected anytime soon. Shipyard, despite revenues staying steady at S$665m, will continue to experience higher operational costs, and risks of more order cancellations.
Cosco also announced that a European customer has cancelled one 57,000 t bulk carrier order and delayed the delivery dates of 2 more by about 6 months. The shipowner has paid compensation to Cosco for the cancellation, and Cosco has said that it is enough to cover their costs. Management also reiterated the risk of further cancellations and delivery delays in the current dismal business environment.
Cosco has guided FY09 earnings to be substantially lower than FY08. We are cutting FY09 net profit forecast by 28% to S$258.8m, assuming even lower shipyard margins. With earnings expected to be volatile in the coming quarters with the risk of further cancellations, we peg fair value at 1.5x price-to-book, or S$0.81. Our Sell recommendation is maintained.
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