Cosco Corp. Singapore Ltd. (COS)’s strategy of seeking orders to build oil rigs and offshore accommodation units to offset slumping ship demand hasn’t convinced investors.
The company, which operates seven shipyards in China, has dropped 49 percent in the past year in Singapore trading. It also has the lowest analyst ratings among major Asian stocks, with 21 sell ratings, two holds and no buys, according to data compiled by Bloomberg. That’s the worst among MSCI AC Asia Pacific Index members covered by at least three analysts.
The shipbuilder has set aside S$164 million ($128 million) for cost overruns since the beginning of last year, or more than its 2011 annual profit, as building drilling units and oil-rig support vessels takes longer and costs more than expected. The company has also offered lower prices and more generous payment terms than Singapore-based market leaders Keppel Corp. (KEP) and Sembcorp Marine Ltd. (SMM) as orders for dry-bulk ships wane.
“They are still facing a lot of issues with the learning curve,” said Yeak Chee Keong, an analyst at Maybank Kim Eng Securities in Singapore, who recommends selling Cosco Singapore’s stock. “If they really want to compete for orders, one of the ways is through lower prices.”
Cosco Singapore, which gets its name from the city where it’s registered and listed, last month agreed to build a semi- submersible accommodation vessel for Cotemar SA at a price at least 30 percent cheaper than Keppel and Sembcorp Marine charged for larger units. The facilities are used for workers on offshore platforms.
The Chinese company will build a unit able to hold 750 people for a price of more than $200 million. Keppel signed a letter of intent to build a 440-person facility for $315 million in March. Both contracts had delivery schedules of about 2 1/2 years, even though Cosco Singapore hasn’t built such equipment previously, according to Nomura Holdings Inc. analyst Lisa Lee.
“It is unclear whether the shipyard will make a profit from the building contract,” Singapore-based Lee said in a note last month. She rates the stock sell.
The shipbuilder, which is controlled by state-owned China Ocean Shipping Group Co., is also increasing its financing costs by letting customers pay for work later. Sevan Drilling AS (SEVDR) will pay for 90 percent of an on-order rig on completion, compared with an original agreement for 80 percent, the Arendal, Norway- based company said last month. Shipyards are usually paid in installments as work progresses.
The change and the possibility of other similar agreements means Cosco Singapore’s credit, foreign exchange and cash-flow risks may be higher than expected, Singapore-based Oversea- Chinese Banking Corp. analysts Chia Jiunyang and Low Peihan said in a note yesterday. They downgraded the company to sell from hold and cut their fair-value price to 84 Singapore cents from 98 Singapore cents.
Li Jian Xiong, vice president at Cosco Singapore, didn’t reply to an e-mail and phone call seeking comments.
“As a relatively new entrant, the company expects to incur higher costs during the execution of offshore marine engineering projects on new product types,” it said in a statement last month. “Progressively, the company will gather expertise and capabilities to reach out to a broader customer base, laying a firmer foundation for long-term sustainable growth in offshore and marine engineering.”
The shipbuilder closed unchanged at 97.5 Singapore cents on the city-state’s stock exchange. The stock will drop to 80 Singapore cents within the next year, based on 13 analyst estimates compiled in the past three months.
The company’s net income fell 25 percent in the first quarter to S$27.8 million, weighed down by S$13.8 million of expected losses on construction contracts. Full-year earnings will drop about 6 percent to S$131 million, according to the average of 19 analyst estimates compiled by Bloomberg. The stock trades at 17 times expected earnings, the highest among the 12 companies in the Bloomberg World Shipbuilding Index (BWSHIP), which trades at a ratio of 10. Only 11 of the index members have earnings estimates.
“Cosco is trading at a premium relative to both the shipbuilding and offshore engineering yards, which is not justified given the company’s poor earnings outlook,” said analyst Robert Bruce at CLSA Ltd., which rates the stock sell and has a 65 Singapore cent target price. “The offshore engineering business is likely to see low margins in the coming years” as it’s taking on a wide range of new products that all have “steep learning curves,” he said in a June 15 note.
This year through May 8, the shipbuilder has won contracts for a wind-turbine installation vessel, two pipe-laying offshore construction vessels, four platform supply vessels, a tender rig, two tender barges, a semi-submersible accommodation vessel and three bulk carriers. The orders are worth $1 billion, according to the company.
In the first quarter, the shipbuilder delivered 12 dry-bulk carriers, a drilling unit and a shuttle tanker. The drill unit was the second of the four ordered by Sevan Drilling. The Norwegian company has options for two more. Cosco Singapore delivered the first rig in November 2009. Delivery was due about a year earlier, according to the March 2007 order announcement.
Cosco Singapore’s dry-bulk ship operations have suffered because global overcapacity and the European debt crisis caused worldwide orders to fall 47 percent to 8.2 million tons in the first five months, according to shipbroker Clarkson Plc.
The company will work through most of its dry-bulk orders by the end of June, increasing pressure to find new work, DBS Vickers Securities analysts Janice Chua and Ho Pei Hwa said in a note last month. Furthermore, at least some of the company’s 47 orders in hand may be at risk of cancellation if a slump in dry- bulk rates continues, according to OCBC.
The slowdown has also prompted other Chinese shipbuilders to target the offshore market. China Rongsheng Heavy Industries Group Holdings Ltd. (1101) intends to win 40 percent of its orders from the sector by 2015, it said last month. It had no such orders on its books at the end of December after delivering a cable-laying vessel in May last year. Yangzijiang Shipbuilding Holdings Ltd. (YZJ) aims to win its first order for a jack-up rig this year after the formation of a venture with Qatar Investment Corp.
“A lot of shipbuilders are vowing to expand into offshore, but it’s easier said than done,” said Bao Zhangjing, deputy director of the China Shipbuilding Industry Economic Research Center. “The technical threshold for offshore is so much higher.”
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