Cosco Singapore falls most in two years as margin may erode

Cosco Corp. Singapore plunged the most in more than two years in Singapore trading after the shipbuilding unit of China’s biggest shipping company said higher costs and lower vessel prices may reduce profit margins.

Cosco Singapore dropped as much as 12%, the biggest intraday decline since May 18, 2009, to $1.50 and traded at $1.51 as of 10:58 a.m. in the island city. The stock is the worst performer on the MSCI Asia Pacific Index today.

 

Operating margins may “be under greater pressure,” as Cosco Singapore builds ships from contracts won in 2010 at lower prices because of the slump in the bulk shipping market, according to a statement on second-quarter earnings the company released yesterday. The shipbuilder’s results were “disappointing,” Nomura Holdings Inc. said in a report.

 

“The weak second-quarter numbers reflect continued weakness at the company’s shipbuilding and offshore engineering business as margins have been affected by execution issues, delivery delays, higher material and labor costs,” Lisa Lee, a Singapore-based analyst at Nomura, said in a note yesterday. “This will likely mean margins will be even lower in the second half.” She has a “reduce” recommendation for Cosco Singapore shares.

 

UOB Kay Hian cut its recommendation on Cosco Singapore shares today to a “hold” from a “buy” and lowered the target price to $1.75 from $2.50. CIMB Group Holdings downgraded the stock to “underperform” from “neutral” and trimmed the target price to $1.40 from $2.30.

 

Net income in the three months to June 30 dropped 53% to $31.9 million, while sales gained 3% to $996 million, the company said. Gross profit, or sales minus the costs of goods sold, fell 38%. That lowered its margin to 7.5% from 13% a year earlier.

 

The average price of a bulk ship dropped 26% last year from the end of 2008, according to Clarkson Plc, the world’s largest shipbroker.