4Q13 PATMI collapsed 80.6% YoY, coming in lower than our below-consensus forecast.

Operating margins slid to a mere 1.0% in 4Q13, dragged down by SGD58.5m of inventory write-downs and loss provisions.

Weak shipbuilding outlook, poor execution and continued margin pressures bode ill for Cosco. Maintain SELL.

What’s New

Cosco’s 4Q13 PATMI of SGD4.6m (-80.6% YoY, +9.0% QoQ) came in lower than our forecast, which was already substantially below the consensus (SGD8.9m vs SGD20.8m). The bottom line was weighed down by an additional SGD58.5m inventory write-down and loss provisions taken in the quarter. Consequently, EBIT margin shrank to a slim 1.0% (3Q13: 4.0%, 4Q12: 7.9%). Cosco declared a first and final dividend of SGD 1.0 cts/share.

What’s Our View

Despite a burgeoning net orderbook which has reached USD7.8b, Cosco’s execution continued to disappoint. In our view, the outlook is depressing, with management flagging sustained margin pressures and operating challenges ahead due to (1) lower-value shipbuilding orders being executed, (2) higher execution costs in offshore projects, (3) intensifying competition in offshore space, (4) technical challenges as it moves up the value chain, (5) possibility of declining shipbuilding orders due to excess industry capacity, (6) the CNY strengthening against the USD, and (7) higher financing costs.

Cosco’s negative view on the shipbuilding sector concurs with our cautious stance on a recovery for Chinese shipbuilders, despite recent market optimism following an uptick in the BDI and shipbuilding prices. We lower our FY14E/15E earnings by 8%/3%. Maintain SELL and TP of SGD0.65, pegged to 1.1x FY14E P/BV.  

Source: Maybank Research - 25 Feb 2014