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DSME Posts Unexpected Billion-Dollar Loss In Q2

DSME
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Published Aug 16, 2016 9:30 PM by The Maritime Executive

On Tuesday, Daewoo Shipbuilding and Marine Engineering posted the worst second quarter results of any of the Big Three South Korean shipbuilders, a net loss of $1.1 billion. Its first half loss came to the same amount. The numbers were far worse than expected: Bloomberg's analyst average predicted that the shipbuilder would break even, as it did in the first quarter. 

Part of the severity of the negative result reportedly stemmed from the accounting treatment. DSME is under investigation for past accounting fraud, and its results were compiled by an external auditor who used a more conservative approach in calculating earnings. 

As the investigation into past business practices continues, forensic accountants have been trying to determine the extent of DSME's losses during the period from 2012 to 2015. Prosecutors say that there is evidence of massive underrepresentation of the extent of the red ink. The number has grown from $1.3 billion to $4.6 billion, and one opposition legislator contends that it may be even larger.

The firm's top leadership changed last year, and it has been working to account for the damage and to move forward. DSME's booking of past losses in a so-called "big bath" at the end of 2015 made it by far the largest contributor to the Big Three's combined annual loss of more than $7 billion. Its shares have been suspended while investigators look into the charges; so far, two former CEOs have been arrested and multiple executives have been called in for questioning, including the current chief financial officer. 

Going forward, the firm intends to improve its earnings next quarter through the sale of land on Geoje Island, home of its Okpo shipyard. It is also cutting overhead by reducing its headcount: 5,000 workers have left the Big Three so far this year, and an additional 1,000 are expected to go by December. 

But observers warn that the decline in sales brought by a simultaneous drop in offshore exploration and in shipping will be a challenge for DSME to overcome. Accounting firm Samjong KPMG predicts that with low sales and a high debt load, the yard will have a liquidity shortage of $2 billion this year, $3.3 billion next year and $4 billion in 2018. 

In addition to its balance sheet difficulties, DSME faces a wave of lawsuits from private and institutional investors regarding losses from the alleged fraud; DSME's stock price fell from $18 in early 2015 to $4 in mid-July, and trading has been suspended. The total amount of the lawsuits already approaches $100 million and is expected to grow.