Why Cosco can't be happy yet with US$700m sealed deals in 2013

Profitability is still hazy.

According to CIMB, Cosco has won US$700m worth of deals YTD. However, CIMB noted that contracts may no longer excite the market as profitability is uncertain.

Here's more:

Cosco has secured contracts from a Singapore entity for the conversion of two semi-completed hulls to high-end floating accommodation valued at

over US$170m each. The first unit is effective. The units are scheduled for delivery 24 months after the contracts come into effect.

What We Think
Including the second unit of floating accommodation, Cosco has won about US$700m worth of contracts YTD, or 35% of our US$2bn order target.

However, we think Cosco is able to meet our expectations as Upstream recently reported that the yard had signed a contract to build two deep-water drillships for US-based newcomer X-Drill, costing US$650m-700m each.

We expect this contract to be formally announcedsoon, pending customer’s deposits and deposits and financingarrangements.

The offshore segment is barely profitable with gross margin at 8-10%, with very little room for error. Cost overruns and provisions are likely to wipe out any profits from these contracts.

As a state-owned enterprise, Cosco may be obligated to keep its current scale of operations and workforce, sacrificing profitability.

What You Should Do
Until Cosco achieves stronger-than-expected earnings for several quarters, we think the stock is not worth the punt despite its recent weakness.

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