| DSME unlikely to show improvement before 2016 |
| Although South Korea’s Daewoo Shipbuilding & Marine Engineering's (DSME's) operating profit stabilised in the fourth quarter of 2014, it is unlikely that meaningful improvement in the figure will be seen before 2016, said an analyst in his research note. NH Investment & Securities analyst John Yu said, “DSME’s fourth quarter 2014 operating profit [of] KRW152.8 billion (USD136 million), which is up from 16.6% in the fourth quarter of 2013, trumped the market projection, but the number remained flat year on year (y/y) due to provisioning of KRW80 billion for long-term receivables. Furthermore, the taking on of low-margin vessel orders continues to be reflected in the shipbuilder’s results= 2E” Yu continued, “Given this, it is unlikely that a meaningful earnings increase will be seen before 2016. Also, the company booked loss provisioning [of] KRW25 billion for some subsidiaries.” Meanwhile, the 2015 new orders are forecast to fall 19% y/y to USD12 billion by the analyst. He said, “Believing that new order momentum for LNG carriers, illustrating the shipbuilder’s high level of dependence will slow y/y, overall 2015 new orders are expected to decline to USD12 billion.” The analyst explained the reasons leading to the decline, “The large Yamal LNG carrier contract of 15 carriers worth USD4.7 billion attracted in 2014 represents a one-off positive. Also, DSME has already filled its docks for 2016 and 2017 deliveries.” He concluded, “Given the plunge in crude oil prices, the drillship market is likely be lacklustre this year, a factor which should spark fierce competition in the commercial vessel market. As such, DSME will likely face difficulty in generating satisfactory margins due to expected heightened competition among the global top-three shipbuilding players.” NH Investment & Securities maintained a “hold” rating on DSME shares and suggested KRW20,000 as a target price. DSME shares are currently trading at KRW18,950. |