Cosco - Expect more cancellations after eight from China Cosco

Cosco Corp Singapore (COS) announced the cancellation of eight contracts worth US$299m and the delay of another three vessels. The cancellations were anticipated and are priced in. Cumulative cancellations account for 9% of order backlog and delays account for a further 19%. However, there is little balance sheet risk. Expect further cancellations and/or delays. As such, we maintain our SELL recommendation.

Order cancellations continue. The cancellations were made on a mutual agreement between COS (COS SP - S$1.16 - SELL) and China Cosco (1919 HK - HK$9.53 - SELL), a subsidiary of the Cosco Group, which is COS’ parent company. We had anticipated that these contracts might be cancelled given the significant delivery delays to date and the low demand for those vessels. Note that China Cosco accounts for c. 29% of total order wins; therefore, further cancellations from the company are likely.

Limited impact. The cancellations do not affect our earnings estimates as we have factored in 25% cancellations. However, it does affect our estimate of the cash balance as we would have expected COS to retain the estimated S$87m in deposits paid in relation to these orders. However, with a cash balance of S$1.8bn, the refund will not have a significant impact on the health of the company’s balance sheet and COS is still in a net cash position. Maintain SELL.

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