Cosco’s new orders to yield low to mid-single digit gross margins

Excluding the four options, the new contract will lift Cosco’s YTD new orders to US$305m.

According to DBS, Cosco has secured seven bulk carrier contracts and options worth US$190m in aggregate from two European companies comprising:

1) One unit of 35k dwt handysize vessel to be delivered in 1Q13.
2) Two units of 64k dwt handymax vessels and four options for similar vessels with eco-friendly and fuelefficient designs. The two contracts are still pending board’s approval and delivery is scheduled in 1Q-2Q14. The delivery for the vessels under options will be 18 months after the contracts are effective.

Here’s more from DBS:

Contract pricing in line with market. We estimate contract values for the 35k dwt handysize and 64k dwt handymax vessels at about US$22m and US$28m respectively, largely in line with the market. Based Cosco’s current cost structure and efficiency level, these vessels could probably yield low to mid-single digit gross margins.

YTD wins lifted to US$305m. Excluding the four options, the new contract will lift Cosco’s YTD new orders to US$305m, representing 15% of our assumption. Recall that Cosco secured piplelay vessel contracts from SapuraCrest worth US$227m in Jan.

Maintain FULLY VALUED and TP of 88cents, implying PE of 14.7x on FY12F earnings. Poor earnings visibility and steep learning curve will add pressure to share price performance. Upside risks are potential asset injections from the parent, earnings turnaround, recovery of newbuild prices and orders.