Cosco Corp (COS): 2Q15 losses not a surprise. Results included one offs like provisions for expected loss on customer contracts, scrap sales, FX and tax credit. Expected losses on construction projects were particularly high reaching $35m.
HSBC believes there might be more to these losses than COS’s explanation (low crude prices, weak bulk shipping market and slump in shipbuilding market).
House thinks that an order backlog of US$8.1b, more than 2x 2014 revenues and in normal circumstances it should be generating profits. Losses might have also stemmed from lack of experience, scale (COS is working on 10 different structures without enough repeat orders) and poor pricing on offshore orders.
HSBC does not see an early end to this downturn as COS’s order backlog is still dependent on offshore orders on which it has earned lower margins. In addition, COS’s offshore backlog is vulnerable to delays and cancellations as it is sourced from smaller customers who may find it difficult to finance the purchase the equipment in the current downturn in the oil & gas industry.
Therefore, till the backlog mix changes in favour of commercial ships, weak margins may continue.
HSBC reiterates its Reduce rating and cuts TP to $0.34.
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