Group 2Q09 EBIT declined 64% y-y to S$79.5mn, against our estimate of S$62.9mn, with EBIT margins contracting by 9.9pts y-y to 11.1%. Included in this was S$25.9mn in reversal in impairment of trade and other receivables and S$8.6mn in exchange gains. This was a quicker-than-expected write-back from S$171mn in provisions made in FY08, mostly in 4Q08. Interest costs increased 637% y-y to S$11.92mn in 2Q09, as group borrowings rose 83% y-y to S$1.2bn.
Management maintained that gross margins for shiprepair remained at 36%, with ship-repair posting estimated gross profits of S$49mn. According to management, newbuildings accounted for 44% of shipyard revenue or S$299.8mn with gross margins of just 1%, giving gross profits of S$3mn. We believe that with persistent and snowballing delivery delays, shipbuilding would have been lossmaking at the EBIT level. Offshore accounted for 16% of revenue, with gross margins of 12% and conversion for 20% of shipyard revenue, with gross margins at 17%, according to management.
Shipping revenue continued to decline sharply, down 45% to S$28.7mn, on collapsing bulk charter rates. Management expects dry bulk shipping to continue to be adversely affected by the weak BDI amidst the global economic downturn.
We remain concerned about continued delays in its shipbuilding delivery schedule. Shipbuilding orderbook YTD stands at US$6.8bn. We maintain REDUCE rating and our price target of S$0.70.
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