Cosco

Cosco: Citi maintains Sell and slashes TP to $0.90 from $1.50. House expect challenging environment to persist and cut earnings forecast by 31-32% over 2012-13E to factor in weaker orderbook prospects and heightened margin erosion in both ship and rig building.

Revised assumptions reduce orderbook forecast by 23-40% to $2b in 2012-13 and further lower margin forecast by another 80-90 bps to 9-11% for 2012-13E. Think it is too early to turn positive given lack of visibility and likelihood of more downward revision.

Key challenges include:
i) Inability to capitalize profitably on its recordoffshore orderbook.
ii) Lackluster BDI suggest volume of new build contracts and ASP will remain depressed.
iii) Significantly YoY gross margin increase for shipbuilding in 1H11 isunlikely to be sustained since 2012 E will begin to recognize a larger portion of lower priced contracts.
iv) Speculative customers (e.g. Sevan Drilling) may face difficulty securing sufficient funds upon delivery.