COSCO

COSCO: 4Q14 net loss widened to $13.2m (4Q13 net loss: $0.8m), bringing FY14 net profit to $20.9m (-31.8%)

For the year revenue increased 21% to $4.26b, on growth in marine engineering and shipbuilding segments, offset by dry bulk shipping and other businesses.

Gross margins narrowed 2.3ppt to 6.8%, mainly due to higher inventory write downs ($86.2m). Particularly in 4Q14, there was a $91.4m write down from the discontinuation of the Octabuoy hull and topside module project announced in Jan ’15.

The slump in bottom line was slightly mitigated by a $9m tax credit (FY13: $8.2m tax expense) from tax incentives, recognition of deferred tax assets and adjustments for over-provision in prior years.

Net gearing spiked to 1.5x (3Q14: 1.2x), due to increased loans for working capital, while Cosco had a negative operating cashflow of $1.4m for the year.

Cosco secured US$1.6b of new orders in FY14. While aspiring to replicate the same in FY15, Maybank-KE sees a deteriorating oil market and depressed BDI to cloud prospects, and forecasts new orders of US$1.3b instead. Order book narrowed to US$8.4b (3Q14: US$8.9b)

Maybank KE sees possibilities for contract cancellation or further write downs. At least two contracts at risk were flagged by management:
1) A DP3 drillship terminated on delay grounds. The first instalment of US$110m together with US$8.1m interest has been refunded, notwithstanding current arbitration proceedings.

2) Deferment of a Sevan Drilling drillship, for 12-months, with options exercisable at 6-month intervals, up to 36 months, from 15 Oct ’14. Construction will continue during the deferred period, while Sevan Drilling while is able to market the drillship as part of their fleet.

First and final DPS of 0.5¢ declared (FY13: 1¢)

Cosco is trading at 0.84x P/B

Latest broker ratings:
Maybank-KE maintains Sell with TP cut to $0.43 from $0.50
OCBC maintains Sell with TP cut to $0.43 from $0.50
Credit Suisse maintains Underweight with TP cut to $0.45 from $0.60