Cosco Corporation - Massive loss due to receivables impairment


Highlights:
Cosco Corporation (Cosco) announced its 3Q15 results after market hours on 12 November. As previously guided by the profit warning announcement on 22 October, the company incurred massive losses this quarter, largely as a result of a significant impairment to its trade receivables. 3Q15 PATMI losses were SGD82.1m vs. SGD7.1m in profit in 3Q14. Management expects the difficult and challenging business and operating conditions to persist, given the current situation of low crude oil prices.

3Q15 underperformance. Turnover decreased by 18.1% to SGD949.6m in 3Q15 vs. SGD1.2bn in 3Q14 owing to a decrease in shipyard and shipping revenue. The group delivered a total of 3 PSVs, 1 AHTS and 1 semi-submersible accommodation vessel in the quarter. Shipyard operations incurred higher costs this quarter for a few delayed projects as well as write-downs of certain inventory amounting to SGD14.6m. An allowance for impairment of trade and other receivables of approx. SGD75.9m has also been made. This resulted in administrative expenses increasing by 327% YoY to SGD113.4m. Financing expenses also increased by 41% YoY to SGD44.2m. Due to the above, 3Q15 PATMI decreased to a loss of SGD82.1m vs. SGD7.1m profit in 3Q14.

Order backlog strong but plagued by deferments and cancellation uncertainties. The group‘s order book stood at USD7.9bn with progressive deliveries up to 2017. However, these orders face high order deferment/cancellation risks, as seen from its announcement on 17 October where Cosco agreed to defer the delivery date of the “Sevan Developer” to Sevan Drilling for 12 months, with options available for an even longer extension period up to 36 months. This option was exercised on 2 November to extend the delivery date for the Sevan Developer to 15 April 2016, and a sum of USD26.3m plus interest is refundable to Sevan Drilling. Such onerous terms are at a disadvantage to Cosco and will likely result in a negative financial impact, in our view.

Stock will remain suspended. Management highlighted in a separate announcement that trading in the shares of the company will remain suspended, pending the outcome of the proposed asset consolidation of business segments of China Ocean Shipping (Group) and Cosco Group.

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What we recommend:
We have an Underperform (4) rating on Cosco and a 12-month target price of SGD0.320, based on a 9.4x EV/EBITDA multiple on 2015E EBITDA, which is 0.5SD below Cosco’s past 10-year average EV/EBITDA of 12.2x. We remain bearish on Cosco’s near-term prospects and reaffirm our Sell (5) rating. Key risk to our call: better cost control resulting in stronger margins. (Read Report)

Read Related Reports
1) Cosco Corporation - Awaiting parent’s restructuring plan by DBS Group Research, published on 16 November 2015

2) Cosco Corp Singapore - Reduce: Losses from operations and write-downs by HSBC Global Research, published on 13 November 2015

Source : Daiwa Capital Markets

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