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Investor CentralCosco Corporation (Singapore) Ltd - Can it earn higher margins from big order book – are all the analysts wrong?
20/8/2013 – Analysts are loathe to give SELL calls, but in the case of Cosco Corporation (Singapore) Ltd they are almost unanimous in their bearishness, after Q2 FY2013 results.
Higher marine engineering revenues couldn't make up for declines in ship building and repair activities, which lead to a fall in revenue and profit.
Near term prospects are also lacklustre.
Orders are up at US$6.7 bln, thanks in part to a US$170m jack-up rig order and a RMB 590 mln order for an offshore supply vessel.
But margins are already thin at around 10.8% in terms of gross margins, and 2.1% on a net basis, and the analysts aren't convinced that it can turn this around.
The financial highlights for Q2 FY2013:
Revenue: -8.7% YoY to S$890.3 mln
Net Profit: -56.4% YoY to S$12.0 mln
Cash flow from operations: S$3.1 mln vs S$101.7 mln
Cash Reserves: S$1.83 bln vs S$1.69 bln
Bullish analyst report
There are no bullish reports.
The Reuters survey of analysts shows that 8 have a SELL, a further 8 analysts have an UNDERPERFORM, and only 1 has a HOLD call on the stock.
Price targets range from 46 cents to 83 cents per share, with the median at 69.5 cents – which is roughly where the stock is currently trading.
Bearish analyst report
OCBC Investment Research says new orders, while plenty, will earn low profit margins in the face of stiff competition.
Also, payment on these orders will also only come in once the projects are delivered, which will put pressure the company's already debt-laden balance sheet.
If China's credit situation deteriorates further, it warns, Cosco could become vulnerable.
OCBC's recommendation is a SELL with a price target of S$0.60.
Maybank Kim Eng Research opines on similar notes and also says yard underutilisation will keep margins down.
Again, Cosco's debt level at S$3.7 bln is a big concern, with US$1.3 bln having to be repaid within a year.
It could refinance this debt, but it will likely be at a higher cost than before.
It has a SELL recommendation with a target price of S$0.65.
CIMB Research adds to the bleak outlook by pointing to low contract values for shipbuilding orders, and coming greater technical challenges and higher costs.
While CIMB Research has the slightly nicer-sounding recommendation of UNDERPERFORM, its target price of S$0.46 is actually below the others.
Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.
1. What strategies is it adopting to increase margins?
2. How concerned should investors be about $1.3 bln in debt repayments falling due in the next 12 months?
3. Analysts are concerned about execution – are you?
We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.
Sofar, we have not had a reply (which is why you are seeing this message).
©2013 Investor Central® - a service of Hong Bao Media
