The CEO of South Korean shipbuilder Daewoo Shipbuilding & Marine Engineering (DSME) does not expect the flow of red ink to stop when it announces its earnings for the second quarter of 2015.
At a press conference to mark his inauguration as CEO, Jung Sung-Leep, who previously helmed STX Offshore & Shipbuilding expressed a gloomy outlook for the second quarter of 2015.
Jung said, “Both Hyundai Heavy Industries and Samsung Heavy Industries incurred substantial losses from the offshore plant sector. These losses have been reflected in their business performance. Our loss from the offshore plant business will also be included in our earnings release for the second quarter.”
DSME had an operating loss of KRW43.3 billion (USD38.5 million) and a net loss of KRW172.4 billion for the first quarter of 2015.
Shipbuilders have been grappling with losses from the offshore plant sectors because of a drought of new orders and customers requesting to defer deliveries of current orders. Drilling companies have sought to defer deliveries in anticipation of difficulties in securing charters as oil companies curtail exploration and production activities.
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When Jung was inaugurated as the new CEO in May 2015, he announced that he would focus on building commercial ships, specialised ships, and offshore plants. At that time, Jung emphasised that DSME would boldly close down unprofitable businesses.
At the press conference, he said, “This year, we will focus on winning orders of vessels outfitted with state-of-the-art technologies such as ultra-large container ships and LNG carriers. I will manage the company with an aim of maximising profit.”
In the meantime, Jung said, “A large-scale restructuring would be burdensome for us. Instead of conducting reorganisation and large-scale restructuring, we will improve our business efficiency by reducing unnecessary expenses and procedures.”
Jung’s bleak forecast for the second quarter of 2015 was echoed by sector analysts.
True Friend Korea Investment & Securities analysts Lee Kyung-ja and Ahn Hyung-jun have predicted an operating loss of KRW45 billion and a net loss of KRW83 billion for the period. The operating loss refers to losses from the company’s core business and excludes losses from asset sales.
Lee and Ahn said, “Delays in drillship deliveries are a burden, similar to other shipbuilders. In fact, it should have a particularly large impact on DSME given the eroded balance sheet.”
The analysts noted that cash inflows of USD600 million from Atwood Oceanics for delays on the delivery of two drillships have been behind schedule.
While DSME was successful in the LNG sector in 2014, with orders for 35 LNG carriers, the revenue would take a long time to be realised due to the tail-heavy payment terms.
This would put pressure on DSME’s working capital and deleveraging should be difficult, opined Lee and Ahn.
Lee and Ahn said, “This appears to be a common problem at shipbuilders, but it should be worse at DSME, given a higher leverage ratio and significant burden from long-term accounts receivable.
“Long-term accounts receivable increased substantially in 2010-11 as ship buyers delayed payments after the financial crisis.”
DSME has recognised bad debt expenses of KRW100 billion per annum and residual long-term accounts receivable have decreased from KRW2.2 trillion in 2011 to KRW1.05 trillion.