Uncertainties linger for South Korea’s Doosan Engine as its shipbuilding customers see orders declining year-on-year, according to a shipping analyst.
After visiting the company, Samsung Securities analyst Youngsoo Han said the company’s earnings and orders “are both likely to improve quarter-on-quarter in 2Q on base effect, but long-term concerns remain”.
The country’s shipbuilders are seeing declining bulker and drill ship orders due to the weak freight market and the drop in oil prices.
The situation also means Doosan Engine is unlikely to be able to raise engine prices easily.
Han noted that although Doosan Engine took in orders of just KRW41.5 billion (USD37.1 million) in 1Q15, the figure would jump in 2Q15 in unrecognised orders.
According to Han, Doosan’s 1H15 orders would be on par with those of 1H14, but falling global commercial vessel demand remains a concern after Doosan’s orders plunged 58% y/y over January-May.
The analyst continued, “Doosan Engine would see its operating losses narrow quarter-on-quarter in 2Q on the absence of requests by shipbuilders to delay engine deliveries which, along with a subsequent fall in sales, was behind sluggish earnings in 1Q.”
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He explained that the background of long-term negatives is due to a ‘chain’ effect.
Shipbuilders delay engine deliveries after customers delay vessel deliveries and bulk carriers are the most vulnerable to delivery delays among major vessel types. Bulk carrier engines comprise 33% of Doosan’s order backlog.
“Doosan is unlikely to avoid negatives from an absence of momentum amid struggles by the downstream shipbuilding industry, especially given weak shipbuilding prices. Also, average sales price hikes are unlikely to rebound much, given weak shipbuilding demand and competition from Japanese shipbuilders that have gained market share on the yen weakening,” Han concluded.
The analyst maintained a ‘hold’ rating on Doosan Engine’s stock and cut 12-month target price by 12% to KRW6,600 which is currently trading at KRW5,550.