Although COSL's net profit surged 57% YoY to RMB636m in 1Q24, it only reached 15% of our original full-year forecast. The suspension of four rigs by a Middle East client will come into effect starting from 2Q24 and hence the QoQ growth may not be that strong in the rest of the year. While we still believe the company can see progress in developing the overseas markets, we remain cautious about near-term earnings uncertainty. We cut our 2024-26 earnings forecasts by 5-15% and lower our target price to HK$9.53 with HOLD call maintained.
Key Factors for Rating
The company's overall gross margin improved from 13.7% in 1Q23 to 16.3% in 1Q24. We believe it was partly boosted by the higher day rates of the big drilling order from Saudi Aramco (ARAMCO AB/SAR30.15, NR).
However, the 3% YoY fall in the operating days of its jack-up rigs was a downside surprise. This implied some of its rigs were left idle or at least not in full operation despite an improved market.
COSL was noticed by Saudi Aramco to suspend operation of four jack-up rigs for twelve months in early April. It will not receive any part of the day rate during the suspension period. If the company has to hot stack the four rigs for the rest of the year, the impact on earnings will be about RMB410m based on its estimation. Meanwhile, it is trying hard to find new jobs for the affected rigs, but it will not be easy. There are altogether 25 rigs from seven companies suspended and the day rate in the region is already under pressure.
Hence, we expect the QoQ growth in the remaining three quarters of the year will not be very strong.
The company's well services segment has made further progress in developing the overseas markets as it has started to sell tools and equipment on top of providing services to overseas clients. However, the margin at early stage is likely to be lower than that in the domestic market.
Key Risks for Rating
Near-term big orders in overseas market.
Higher-than-expected earnings.
Valuation
We lower our target price for its H shares from HK$9.69 to HK$9.53 to reflect the cuts in our earnings forecasts. Our target valuation is still 0.95x 2024E P/B.
We increase our target price for its A shares from RMB19.69 to RMB19.94. We still base our target price on its 3-month average A-H premium which has expanded from 120% to 126% since early April.