Shipbuilding revenue rose 22.6% yoy to S$299.8m (+55.6% qoq) while revenue for the ship repair, conversion and offshore segments fell 39.4%, 52.0% and 30.4% respectively. According to management, dry bulk shipping earnings totalled about US$20m for 1H09 (1H08: US$55m). This translates into a net margin of 38% (1Q09: 40%).
Management guided that 2Q09’s shipbuilding gross margin was only 1%. This was mainly due to higher operating costs as COSCO (S) procured 400,000 tonnes of steel at Rmb6,000/tonne in 2008 compared with an average of Rmb4,364/tonne in 2007. This amount of steel can build up to 40 dry bulk vessels. Steel price has since fallen 33% to an average of Rmb4,000/tonne.
Total borrowings rose from S$656.6m in 1Q09 to S$1.2b in 2Q09 to fundshipyard expansion. COSCO (S) had net cash of S$672.2m as of end- 2Q09.
Gross orderbook stands at US$6.8b (we estimate net orderbook at US$4.5b). Of the 100 dry bulk carriers in its orderbook, 39 are under construction. The Group is targetting to deliver 12 vessels in 2009, one of which was delivered in 1Q09. Twenty-nine vessels are scheduled for delivery in 2010 and 48 in 2011. Eleven dry bulk vessels will be on sea trial from now to end-09. To date, there have been 37 delivery delays and 13 order cancellations.
The contract for Sevan Driller 2 is still pending finalisation although Sevan Marine has announced it has secured equity funding for the drilling unit. If this contract materialises, it will be COSCO (S)’s first contract clinched in 2009.
We estimate COSCO (S)’s shipyard turnover to fall 5% yoy to S$3.0b in 2009 (2008: S$3.2b) due to lower ship repair and conversion revenue. Shipping turnover is forecast to halve to S$128.7m in view of a weaker dry bulk shipping market.
We believe COSCO (S)’s share price will remain in the doldrums in view of the following: a) poor shipbuilding execution at its shipyards, b) current low level of contract wins, c) potentially more order cancellations and delays, and d) an uncertain dry bulk shipping outlook. That said, should the Sevan Driller 2 contract materialise, share price could see some short-term strength.
COSCO (S) trades at PEs of 22x 2009 and 25x 2010 earnings. In view of its poor prospects, we reiterate our SELL call with a fair price of S$0.95 based on sum-of-the-parts valuation.
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