UNDERPERFORM: CIMB-GK SecuritiesJan 06, 2009 The Business Times
Cosco Corporation
Jan 5 close: $0.99
CIMB-GK SECURITIES, Jan 5
COSCO recently warned that its FY08 earnings will be lower than FY07. We estimate a loss of about $16 million for fourth quarter 2008 with FY08 net profit of $310 million, down 8 per cent year-on-year.
We believe that customer credit risk has heightened as more ship owners are negotiating for delays in progressive payments due to the credit financing drought. The deteriorating shipping industry with near break-even freight rates could also cause ship owners to delay taking delivery of new vessels to avoid operating at a loss. In Q4 alone, Cosco has announced pushing back deliveries of 21 vessels by six to 26 months.
Cosco's problems have been worsened by operational woes as shipbuilding margins have been hit by higher steel and ancillary outsourcing, tighter pre-delivery inspection procedures costs and additional development cost to vacate residential properties originally planned for yard expansion. The inconsistent disclosure of the number of ships under construction and delivery schedule also added to our negative view on the stock.
Our earnings estimates have been cut by 15 to 30 per cent for FY08-FY10. We have also cut our target price to $0.58 from $0.80.UNDERPERFORM
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