COSCO looks to offshore for its comeback

With its shipping segment in a major revenue slump, the firm will pin its hopes on higher margin offshore deals.

But can COSCO cut costs and pad margins enough to offset falling earnings from its order-starved shipping division?

Here's more from DBS:

A disappointing 1Q12. Cosco’s 1Q12 net profit of S$27.8m (-25% y-o-y and -28% q-o-q) fell short of market expectations by 15%, making up only 21% and 20% of our and consensus’ FY12 estimates. The underperformance came from weak shipping earnings led by low freight rates, and lower than expected profits from low-priced shipbuilding contracts secured in 2010/11.

Apart from the shipping segment, which saw significant revenue and margin decline, gross margins in offshore, shiprepair and conversions held up at above 10%. Shipbuilding’s margin hovered around 6-7% as efficiency gains mitigated the lower contract prices. The company delivered 12 bulk carriers (full year target of 35 units), Sevan Brasil and one shuttle tanker in 1Q12. Current orderbook of US$5.8bn translates to 1.7x book-to-bill ratio.

Lackluster outlook for shipping, shiprepair and shipbuilding. Management cautions for further potential margin contraction for shipbuilding segment in the absence of high-priced contracts. Cosco is under pressure to fill up its yards’ capacity, as majority of the bulk carrier orders would be delivered by 1H13. Shiprepair business remains highly competitive given the overcapacity in China while shipping income may be worse off in 2Q as three vessels were renewed at low freight rates when BDI<1000 in 1Q.

Offshore is the silver lining. Cosco is a beneficiary of the upturn in offshore projects. YTD order wins were very strong at US$1.1bn, forming 53% of our assumption of US$2bn. Enquiry levels for offshore projects remain high. Management expects better margins of 10-15% (from 10%), with payment terms improving to 30/70 (vs 10/90 or 20/80 previously). In our view, climbing up the learning curve is a key challenge for Cosco.

Trimmed FY12/13F earnings by 9%/4%. We have cut our FY12/13F net profits by 9%/4% to account for weaker shipping, shiprepair and shipbuilding profits. It will take time for earnings to turn around.

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