HEADWINDS REMAIN



• FY12 net profit fell 24% YoY 
• S$17.6m of write-backs in provisions 
• Debt levels remain a concern 


FY12 results within expectations 
COSCO Corp (S’pore) reported a decent set of results that were within 
ours and the street’s expectations. FY12 revenue decreased 10% to 
S$3.7b, while PATMI fell 24% to S$106m. The declines largely 
reflected the general weakness in the shipbuilding environment and 
COSCO’s initial expansion into the offshore segment. The group’s 
order-book improved to USD6.1bn, up from USD5.7b as of last 
quarter-end.  


Margins appear to have stabilized… 
In 4Q12, COSCO wrote back S$17.6m of provisions for its contracts. 
This represents the third consecutive quarter of write-backs after an 
eight-quarter trend of making provision for expected losses. This 
implies improved execution for its shipbuilding and offshore projects. 
Its margins also appear to have stabilized. Excluding the provisions 
and write-back of provisions, the group’s gross margin was 12.2% for 
FY12, slightly lower than 12.8% in the previous year. 


But cash generation remains weak 
However, the group’s cash generation capability remains weak. 
Despite a 10% decline in revenue in FY12, cash outflow in operating 
activities ballooned to S$580m from just S$52m a year ago. The main 
culprit was its trade and other receivables. This is largely because 
payment schedules for the recent contracts are more back-loaded 
(typically 20/80), resulting in the shipyard having to fund most of the 
shipbuilding costs upfront, before collecting back the amounts owed 
on vessel delivery dates. 


Will net gearing continue to rise? 
COSCO’s net gearing (net debt against shareholder’s equity) increased 
to 1.0x as of end-2012 (end-2011: 0.4x). As the group continues 
construction in 2013 on the low-margin and back-loaded contracts 
secured in 2010-2012, its debt level may continue to rise 
incrementally going forward. Meanwhile, management acknowledged 
that the business and operating conditions in 2013 may be even more 
difficult and challenging. Rolling forward to FY13F, we raise our fair 
value estimate to S$0.90 (on 1.5x P/B). Maintain HOLD. 


  

  OCBC Investment Research