Cosco Corp weak 1Q13 on lower other income

Deutsche Bank

1Q13 net income down 65% yoy, challenging conditions remain
COS’s 1Q13 sales declined 25% yoy to S$733m, while PATMI fell 65% yoy to S$9.7m. The weak results were due largely to a steep decline in other income, where currency exchange swung from a profit of S$15m in 1Q12 to a loss of S$4m in 1Q13, and scrap material sales declined 54% yoy to S$7.6m. Its gross margin, however, rose from 10.1% in 1Q12 to 10.7% in 1Q13, due to higher profits from marine engineering projects. We lower FY13-15E earnings by about 10-14% and our target price from S$0.95 to S$0.90. COS’s current valuations appear fair, in our view. Maintain Hold.

Offshore improving but new products could affect margins
Although COS’s execution has improved in offshore engineering, as shown by a reversal of expected losses on construction contracts (loss of S$13.8m in 1Q12 to slight profitability in 1Q13), management warns that the execution of new product types could lead to higher costs in future. COS’s YTD wins total US$254m and it had an order book worth US$6.4bn as at Mar-13.

Weak shipbuilding fundamentals
COS expects the challenging operating conditions to continue with tight credit conditions, increases in raw material prices and wages, along with rising competition in offshore & marine. Weak sector fundamentals have led to sharp declines in new orders and low vessel prices. As yards in China deliver the remaining orders they have in 2013, the worry should be on 2014 and beyond as Clarkson data suggest a sharp decline in deliveries for bulk carriers and containerships from 2013 to 2014. COS is targeting new orders worth US$2bn in FY13 (90% of which may come from offshore engineering).

Target price of S$0.90 and Hold rating maintained
Valuations remain unattractive in light of the weak industry outlook. We peg COS’s target multiple at 1.5 P/B (FY13E) to derive our target price of S$0.90. Our target price implies 16.3x FY13E PER, below its 2005-12 average of 20x but above its 2009 trough of 9.7x. Upside risks: decline in steel prices, better than expected project execution and easing credit markets. Downside risks: a sustained fall in the BDI, a slowdown in Offshore, execution issues, and a tightening in credit markets.