Cosco

Cosco: As expected, Cosco slipped into the red in 2Q15, following recent profit warning, with a net loss of $4.8m versus a $14.3m profit a year earlier.

This came on the back of a 25.6% y/y slide in revenue to $853.5m, largely due to weaker contributions from marine engineering, partially offset by improved shipbuilding performance. In all, Cosco delivered three bulk carriers as well as 1 AHTS vessel during the quarter.

Operating margin was eroded to 2.4% from 5.3% in 2Q14 due to several factors:
1) Continued gross margin squeeze to 6.9% (1Q15: 7.4%, 2Q14: 8%) due to Loss provision of $34.1m for construction contracts
2) Drop in other income of $19.9m (-35.3%) due to lower sales value of scrap materials and interest income
3) Absence of fair value gains on forward currency contracts (2Q14: $4m)
4) Increased finance costs of $40.2m ((+13.8%) due to higher bank borrowings of $5.6b (2Q14: $4.5b)

The bottom line performance would have been worse were not for a $1.6m tax credit largely due to over provision in prior financial years.

During the quarter, the group secured new orders for two smaller vessels a FPSO conversion but these were won at low contract values and may face severe margin pressure. Although Cosco’s US$8.1b (unchanged from 1Q15) order book provides some revenue visibility till 2017, the current overcapacity in shipping and depressed offshore markets put these contracts at risk of delivery extensions and even cancellations.

Already, Cosco has experienced several delivery deferrals from customers, namely KS Drilling, AXIS Offshore, and Sevan Drilling. Further deferrals would put increased pressure on the group’s cash flows as it is now heavily indebted with a net gearing of 1.8x (1Q15’s 1.5x).

Management is bracing the company for persistent difficulty in the current low oil price environment.