Analysts have cautioned against buying the stocks of Samsung Heavy Industries (SHI) and Daewoo Shipbuilding & Marine Engineering (DSME), after both shipbuilders posted massive losses in the second quarter of 2015.
On 29 July, SHI announced KRW1.15 trillion (USD987.14 million) loss for the second quarter, reversing a KRW11.6 billion profit for the same period last year.
DSME had a massive KRW2.4 trillion loss, a result that was expected after it admitted to concealing up to KRW3 trillion in losses from offshore plant projects from its balance sheet. For the second quarter of 2014, it had a KRW138.7 billion loss.
KDB Daewoo Securities analyst Sung Ki-jong noted that SHI was hit by construction missteps stemming from the company’s lack of experience in large-sized engineering, procurement, and construction projects. The shipbuilder also took hits in its areas of strength – drillships and commercial vessels – because of production disruptions caused by the misallocation of labour resources.
Samsung Securities analyst Han Young-soo predicts a KRW1.11 trillion full-year loss for SHI.
As for DSME, Han predicts a KRW19.6 billion loss for 2015.
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He said, “In addition, 2016-17 earnings estimates are likely to fall further, as projects provisioned for in the second quarter of 2015 should offer zero gross margins but still incur selling and administrative, resulting in more operating losses. Secondly, we cannot rule out the chance of a change in DSME’s capital structure. The capital impairment resulting from the second-quarter loss has worsened the firm’s debt ratio to around 700%, enough to restrict bidding, funding, and other activities. DSME may have to turn to a rights offering, and at this point, there is no way to tell how much or when shareholder value would be diluted.”
DSME’s order momentum will likely slow down, as creditors and major shareholders restrict the firm from engaging in aggressive order-taking activities.
Hyundai Heavy Industries (HHI), the world’s biggest shipbuilder, can take comfort from a recovery in commercial ship orders, said CIMB Securities analyst KJ Hwang.
HHI posted a second-quarter loss of KRW241.1 billion, worse than the KRW138.8 billion loss for the same period a year ago.
Its earnings were hurt by its oil refining business – Hyundai Oilbank’s revenue slumped 37.3% year on year (y/y) to KRW930 billion due to lower oil prices. Revenue at the onshore plant, offshore platform, and shipbuilding divisions grew 135.9%, 31.9%, and 2.3% y/y, respectively.
The operating loss was partly attributable to the shipbuilding business, which posted a KRW120.3 billion loss due to Hyundai Samho Heavy Industries’ specialty ship construction issues. The offshore division also suffered a loss of KRW291.2 billion, hurt by construction delays.
However, Hwang, following a briefing given by HHI’s finance chief, noted that HHI’s standalone commercial ship margins are at near-breakeven point levels and many of the low-priced ships ordered in 2013 would be completed this year.
“Hyundai Samho Heavy Industries’ profit margins would also normalise as the problematic vessels are incrementally cleared off, enhancing its man-hour productivity in the second half of 2015,” noted Hwang.
In addition, HHI expects USD320 million worth of changes in offshore plant projects to be completed this year, including seven modules for processing facilities at the Gorgon LNG project and BP’s Quad 204 FPSO.
Hwang, who predicts a KRW106 billion full-year profit for HHI, said, “While HHI said it has achieved about 80% of its 2015 order target already [including options], far ahead of its peers, management remained upbeat on strong order potential for product tankers and mega-container ships, whereas VLCCs look set to take a breather due to strong contracting activities year to date.”