Sevan says it is withholding payments amounting to US$7m, and has reportedly spent around US$130m so far, out of a total contract value of US$350m, including topside fittings. The greater concern is that Sevan may be facing funding issues in the current credit environment. At worst, there could also be operational issues with these new vessels which are preventing them from securing firm charters.
Cosco is building a similar drilling unit for Sevan, and our concern is that Sevan may not be making payments on this contract as well. The contract, worth around US$202m, is 65% paid up to December. We have already seen warning signs - initially, this unit was to be completed in December, but according to Cosco, this has been delayed due to variation requests from Sevan, and will now be delivered by June 2009.
Cosco has seen a raft of bad news in the past year, with the cancellation of 4 bulk carrier orders and rescheduling of another 21. It made provisions for trade receivables and delays of S$89.1m in FY08. We believe Cosco could announce more order cancellations and/or delays as the business climate remains dismal. With this latest development, Sevan could certainly be a high-profile candidate – we estimate that around US$70m of the outstanding contract value could be at risk.
We are setting fair price at 1.1x book value, or S$0.57 per share, in line with trough valuations for the marine sector. We expect Cosco to be profitable on its US$7.3bn orderbook, but forecasts are at risk from more cancellations and provisions. Management will also need time to get its house in order, having expanded too quickly and with insufficient risk controls, which have exacerbated the current situation, in our opinion.
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