1Q14 PATMI of SGD12.6m (+29.6% YoY, +174.1% QoQ) missed expectations after adjusting for irregular items.

Weak execution remains key drag on profitability.

Maintain SELL and TP of SGD0.65, pegged to trough P/BV level of 1.1x.

What’s New

Cosco posted 1Q14 PATMI of SGD12.6m (+29.6% YoY, +174.1% QoQ), which made up 22% and 24% of our and consensus forecasts. But after accounting for irregular items, it was still a tad short of expectations. Pre-tax profit saw a SGD9.4m boost from a reduction in depreciation charge due to a change in the estimated useful life of some fixed assets. Net reversals on inventory write-downs and previous loss provisions amounted to a total of SGD3.4m.

What’s Our View

Operational performance continued to disappoint in 1Q14. Were it not for the lower depreciation charge, gross margin would have been nearer to the 8% level as opposed to the headline figure of 9.2%. The potential impact from the cancellation of a near-completed drillship due to delivery delay is a further dampener. Cosco has since refunded the first instalment of USD110m together with USD8.1m in interest payment to the customer. The drillship is carried on its book at an estimated market value of USD634m and Cosco is looking to resell it to recoup any potential losses.

YTD order wins totalled USD210m, with net orderbook of USD7.6b marginally down from USD7.8b a quarter ago. Cosco is targeting USD2.0b in new orders this year, although we do not expect commercial shipbuilding orders to return in a big way. In the meantime, its weak execution of offshore contracts remains the key drag on profitability.

We lower our FY14E-16E net profit forecasts by 8-9% on a 0.4ppt cut in gross margin estimates to 10.7-10.8%. Maintain SELL and TP of SGD0.65, pegged to trough P/BV level of 1.1x.

Source: Maybank Kim Eng Research - 2 May 2014