Why Cosco Corp's earnings results could be uglier in 4Q

Redemption is still a long way, says analyst.

According to CIMB, after five consecutive quarters of provision writebacks, which offered hope that its operations might stabilise, Cosco once again reminded us that redemption is still a long way off. 

Here's more from CIMB:

Cosco recorded S$4.2m in core earnings for 3Q as it was hurt by provisions for contract losses and inventory writedown, which totalled S$49.7m.

The group achieved gross profit margin of 7.4% for 3Q, bringing 9M gross margins to 9.5%. 3Q could have been uglier if it had not been for a one-off compensation of S$13.2m received from customers. As a result, we now lower FY14-15 EBIT margins by 0.4% pt (FY14: 5.7%, FY15: 6.3%).

We believe that Cosco’s 4Q results could be uglier, owing to the reversal of profits for the cancellation of its drillship order.

The cancellation is now under arbitration and the company is unable to quantify any financial impact.

However, in line with the conservatism principle in accounting standards, we believe that we would see the impact in 4Q. 

Upside risk would come from a successful sale of the drillship. The unit is undergoing sea trials and Cosco shares that it has several enquiries for the vessel.