Why the fuss over Cosco?

The market continues to accord Cosco premium valuations but KimEng sees no justification for this.

Rohan Suppiah, analyst at KimENg notes that Coscos’ earnings are in decline, its order book is dwindling and margins are thin.

Here's more from Mr Suppiah:

What’s the fuss all about? Cosco simply looks overvalued. While the market has grown more optimistic about the marine sector on account of a few key contract wins by the established offshore yards, Cosco still does not have the credentials or the fundamentals to ride those coattails. Its recently-reported FY11 financials also do not inspire confidence. 

Numbers are down and will stay down. While Cosco’s FY11 net profit decline of 44% to $139.7m despite an 8% pickup in revenue came as no particular surprise to the market, its share price has been resilient and valuations have stayed rich. However, we believe that market optimism on the stock is misplaced, as we see no recovery to its earnings based on its current orderbook and our projection of new order wins. Core margins remain weak, hovering at an abysmal 2.8%. Financials still problematic. Cosco’s financial metrics continue to be weak across the board. Gearing, for one, has jumped from 7% in FY10 to 29% at end-FY11 after the company increased borrowings to expand its yards and finance its ongoing orders. In addition, provisions are still being made for its ongoing jobs due to start-up and execution issues, particularly with regard to the more complex offshore jobs.

Orderbook not growing. With a recent US$190m order win for the bulk carrier segment unexciting, net orderbook now stands at US$6.2b. This is still lower than its peak of US$7.0b at June 2011. US$300m in new orders have been secured year-to-date. This is still running short of management’s expectation to secure some US$2b in orders for FY12. Furthermore, the quality of new orders remains in question, with weak
pricing for bulkers, and a risk to margins for potential offshore wins.

Premium unjustified, maintain Sell. With peers trading at a PER of 12x, we see no reason for Cosco to trade at a premium in view of its declining EPS. A re-rating to its peers values Cosco at $0.72, or downside of 39.7%, hence our Sell call.