Why analysts think COSCO may have to reverse profits on drillships

Is there a way out?

According to OCBC, COSCO Corp (Singapore) reported a 6% YoY rise in revenue to S$989.4m but saw an 84% drop in net profit to S$4.2m in 3Q13, such that 9MFY13 net profit accounted for 53% of our full-year estimate.

The results also disappointed the street, as 9MFY13 net profit only made up 42% of the full-year consensus figure of S$62.6m.

Here's more from OCBC:

Operating profit margin was only 1.2% in 3Q13 vs. 4.8% in 3Q12, mainly because of a S$33.9m provision for expected losses on construction contracts. A S$15.8m provision was also taken for inventory writedown.

This resulted in a net profit margin of 0.4% in the quarter vs. 2.8% in 3Q12.

After five quarters of either little cost overruns or reversal of provisions made earlier, COSCO returned to making provisions on its construction contracts again, dousing hopes that it is gaining footing on the execution front.

For the upcoming quarter, the group may even have to reverse profits on its “substantially completed” drillship that is mired in arbitration proceedings with customer Dalian Deepwater Development (DDD), unless COSCO is able to quickly find another buyer for its drillship.

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