CIMB upgrades Cosco Corp. to Neutral despite 3Q12 net profit coming in slightly below expectations on lower revenue and higher interest costs.
“The risk-reward is balanced as execution appears to be improving with Cosco no longer providing for expected losses on construction jobs.” It notes Cosco reversed $8.9 million of provisions for expected losses on construction contracts, the second quarter of write-backs, which it believes could be from improved efficiency and an appreciating yuan. It notes offshore gross margin remained steady on-quarter at 9%-10%;
“We believe Cosco is mimicking the Koreans in competitive bidding with lower margins, rather than having idle yards.” It notes ship repair segment conditions are worsening, with revenue down 17% on-quarter and 10% on-year, while gross margin fell to 14%-18% vs 2Q12’s more than 20%. It cuts FY12-14 EPS forecasts by 7%-14% on changes to revenue, margin and interest estimates, but raises its target to $0.88 from $0.85 after rolling forward to FY13 forecasts. “We think execution and cancellation risks remain, hence our upgrade only to a Neutral.” The stock is up 0.6% at $0.89.
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