COSCO Corp still difficult and challenging

Decent 1Q14 results helped by accounting change
COSCO Corp reported a set of in-line results, with a 42% YoY rise in revenue to S$1.04b and a 30% increase in net profit to S$12.6m in 1Q14, accounting for 27% and 27.9% of our full year estimates, respectively. Excluding one-offs such as a S$4.8m fair value loss on forward currency contracts and a S$2.98m reversal of expected losses on construction contracts, core net profit looked decent at S$14.4m. We note, however, that a revision in the estimated useful lives of certain assets had led to an increase of about S$9.39m in pre-tax profit by way of a decrease in depreciation charge in the quarter.

Hoping to sell deepwater drillship soon
For the deepwater drillship contract that was terminated by Dalian Deepwater Development, arbitration in London is still ongoing. We understand that the contract was cancelled due to a delay in delivery of the vessel (now completed and sitting on COSCO‟s books at about US$630m), and the first instalment of US$110m has been refunded to the ship owner, along with interest payment of
US$8.1m. However, we still do not have clarity on the eventual financial impact of the arbitration. Meanwhile, COSCO is in talks with potential buyers of the drillship.

Still a risky proposition
As at 31 Mar 2014, the group‟s order book stood at US$7.6b, but many orders are likely to be executed at low margins. YTD, COSCO has secured new orders of about US$210m vs our full year estimate of US$2b. Management continues to expect “difficult and challenging” business and operating conditions this year, which does not augur well for a company with a net gearing of 1.1x and is still scaling the offshore learning curve.

Maintain SELL with S$0.61 fair value estimate, based on 1x FY/14/15F P/B.