Cosco's financial risks escalate

Net gearing ratio climbed to 64.8% in 3Q.

The figure is up from 53.3% and is expected to climb further as the payment schedules for the recent contracts are now more back-loaded. OCBC however said financial risks are manageable.

Here's from OCBC:

3Q results within expectations
COSCO Corp (Singapore) reported a fairly muted set of 3Q results that were roughly in-line with ours and the street’s expectation. 3Q12 revenue was down 3% YoY to S$937m, while PATMI decreased 17% YoY to S$26.6m.

The weaker financial performance was mainly a reflection of the general weakness in the shipbuilding industry and
COSCO’s initial expansion into the offshore business.

Write-back of provisions
During the quarter, COSCO wrote back S$8.9m of provisions for its construction contracts.This comes after S$15.9m of write-backs in 2Q12, reversing its eight-quarter trend of making provisions for expected losses on its contracts.

This could imply improved execution for its shipbuilding and offshore contracts. Indeed, management has also said that its shipbuilding process is now quite smooth, and it is climbing up the learning curve for offshore projects.

Stretching the balance sheet
Meanwhile, the group’s net gearing ratio (net debt against total equity) has climbed to 64.8% from 53.3% in the previous quarter.
The increase was mainly to fund shipyard operations.

As the payment schedules for the recent contracts are now more back-loaded (typically 20/80), we expect its net gearing to rise incrementally going forward.

However, we believe that the financial risk arising from higher debt levels is still manageable. This is because COSCO – being
a key state-owned enterprise – is likely to have good access to bank credit lines and could possibly borrow at favourable interest rates.

Approaching FV; Upgrade to HOLD
COSCO’s share price has fallen by 10% since we downgraded it about four months ago (see our report ‘Clouds darken’ on 26/6/2012).
However, as the current price has a less than 10% downside to our unchanged S$0.84 fair value estimate, we are now upgrading the
counter to HOLD.

Reaching the people who run Asia's businesses is harder than it used to be.

Inboxes are crowded. Attention is short. The executives you most want to reach — the founders, CFOs, and operators who actually move budgets — are the hardest to find through the usual channels. If you're building a company, a category, or a reputation, you already know this.

We've spent twenty years building the room they read. Singapore Business Review is where senior decision makers in Singapore and across Southeast Asia come for business coverage they can't get elsewhere — in print, online, and in person at the summits and roundtables we host across seven markets.

If you have something these readers should know about — a point of view worth publishing, a product worth their attention, an event worth their time — we'd like to hear what you're trying to do.

Book a meeting

| Or download the media kit (PDF)

240,000 senior readers quarterly in print Top 1,700 Singapore companies reached

7 markets across Southeast Asia