Why Cosco Corp’s 19% profit jump in Q2 is no cause for joy

Management is pessimistic amid thin margins.

Shareholders of Cosco Corp shouldn’t celebrate too soon about the shipbuilding firm’s upbeat Q2 results.

According to Maybank Kim Eng, Cosco reported a 29% YoY rise in revenue to S$1.15b and a 19% increase in net profit to S$14.3m. However, gross margin dipped QoQ to 8.0%.

“Margins should remain under pressure from wages, raw material prices, competition, financing costs and CNY strength. Management appears more pessimistic on new orders than a quarter ago but keeps its USD2.0b target,” noted Maybank’s report.

Meanwhile, a report by OCBC states that management continues to expect “difficult and challenging” business and operating conditions this year, which does not augur well for a company with a net gearing of 1.2x (vs. 0.5x in 2Q12 and 0.9x in 2Q13) and is still scaling the offshore learning curve.

According to OCBC, “We would not read too much into quarterly earnings, though, given the potential for huge swings in earnings due to the group’s current stage in the offshore learning curve – e.g. 1H13 net profit accounted for 70% of FY13’s full year earnings. A S$12.9m allowance was made in 2Q14 for inventory write-downs, but on a more positive note, there were no provisions made for construction contracts in the quarter.”