Positive highlights: 1. Reversal of impairment of trade receivables of S$26m, thus removing overhang on weak customer credit quality and customer nonpayments. 2. Management disclosed that they are currently in talks with three clients on offshore contracts which may translate to new order flow.
Negative spots: 1. Gross profit margin for newbuilding declined drastically from ~5% to ~1%, despite partial steel inventory write-down of S$89m in 4Q08 which would have possibly eased off some cost pressure. Nevertheless, this also reflected poor yard execution. 2. Cosco gained S$16.4m (-57% YoY) from the sale of scrap metals in 2Q09. Management noted that approximately 50 ships were repaired during the quarter (vs. an average of 106 ships per quarter in FY08). 3. Higher interest expense of S$12m (+637% YoY) on increased borrowings to fund yard expansion. 4. Free cash flow remained negative as revenue recognition was pushed back and capex had not scaled down. 5. Since Dec 08, 37 bulk carriers have been deferred while 13 others cancelled to-date, affecting 50% of the total order book.
Cosco is currently trading at 19.6x FY09 P/E and 2.5x FY09 P/B which looks expensive to us, especially when Cosco’s results once again suggested poor yard execution and deliverables. In the near term, the lack of new order flow, further potential order cancellations and more delays in ship deliveries could weigh down on this stock.
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