COSCO battered by deteriorating margins and massive project cancellations in Q3

There’s no turnaround in sight for the shipbuilding firm.

The third quarter brought no good news for COSCO Corp. Though the firm reported a 17% year-on-year rise in revenue and a 69% increase in net profit, analysts remain unimpressed with COSCO's prospects after it was hit by a slew of project delays and cancellations.

According to OCBC, COSCO’s delivery of its Sevan 650 unit has been extended to up to 36 months from Oct 2014, a significant delay from its 2Q14 original delivery date.

COSCO struggles with cancelled projects. Dalian Deepwater Development terminated a deepwater drillship contract worth around $464m, while its contract for Octabuoy hull and topside module worth around $309m has also been cancelled.

“As at 30 Sep 2014, the group’s order book stood at US$8.9b, with progressive deliveries up to 2016. However, as the group continues to execute projects that were secured in recent years “at low contract “values” due to the weak shipping market, it expects operating margins on these new shipbuilding projects to face downward pressure despite improving gains in efficiency and productivity. This does not augur well for a company with a net gearing of 1.3x (vs. 0.6x in 3Q12 and 1.0x in 3Q13) and is still scaling the offshore learning curve. Given COSCO’s weak execution abilities, relatively poorer quality clientele, and deteriorating balance sheet amidst a slowing offshore market, we lower our P/B from 1.0x to 0.8x, resulting in a lower fair value estimate of S$0.50,” stated OCBC.

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