It falls 7.8% to 95cents, less than a fifth of its year-high price of $5.87 in January
By VINCENT WEE
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COSCO Corporation (Singapore)'s warning of lower 2008 profits - which it issued on the penultimate day of a year in which Chinese shipbuilders have gone from hero to zero - sent its shares diving yesterday.
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The stock fell eight cents or 7.8 per cent to close at 95 cents, less than one-fifth of its year-high of $5.87 in January. Almost 30 million shares changed hands, making it the most heavily traded for the day.
Tuesday's announcement was the latest in a relentless spate of woes the counter has gone through since it first dropped the bombshell in April that it would not be proceeding with a US$202 million semisub contract for Red Flag AS. The share price tanked 15 per cent to bring Cosco shares below the $3 level for the first time in 2008 and it has been looking bad since.
At the time, analysts still kept their faith with the China-based ship and rig builder, maintaining their ratings, as the belief was that it was a one-off case and Cosco had no other contracts with the client. In addition, profits were still coming in, with first quarter net profit doubling to $84 million.
The next problem Cosco faced was on the public relations front when even with the prospect of good news from a contract potentially worth US$2.4 billion, the company faced flak ironically because of its new policy in the wake of the lashback from the Red Flag deal. Cosco had instituted a new policy of only announcing contracts after deposits have been received. But this raised investors' concern over the lack of timely disclosure and significant shareholder transactions.
These concerns were exacerbated and investors further punished Cosco for the lack of details surrounding long-time president Ji Hai Sheng's surprise retirement in August. Fears of trouble at the top sent the stock lower and entrenched it at the poorer end of the $2 range.
The counter faced more resistance in October as it became clearer that the profit momentum was slowing down - third quarter net profit rose just 17 per cent from the year before. Analyst reports had started to turn negative at the beginning of the month, with Credit Suisse slashing target price by more than half to 55 cents.
Sentiment was hit by the worsening dry bulk freight rate index (Cosco has a dry bulk carrier business) and worries that it would struggle to deliver orders this year. Cosco shares' fall to the $1 level in mid-October heralded its slide into the long dark winter of penny stock status which it has stayed in for much of the last quarter.
With the cancellation of two out of an order of five dry bulk carriers at the beginning of December, Tuesday's profit warning should come as no surprise. Noting that nine month net profit of $326.5 million 'deviates significantly from FY08 consensus estimate of $425 million and our own forecast of $465 million', Kim Eng Research analyst Rohan Suppiah added 'we are downgrading Cosco to a 'hold', and cutting our target price to $1.35'.
Mr Suppiah added that although this represents a 31 per cent upside to current price, 'we are reducing our recommendation to a 'hold', as we are unable to determine the full level of provisioning at this point, raising the risk of further earnings downgrades'.
DMG and Partners analyst Serene Lim meanwhile was even more severe. 'While we have previously factored in 20 per cent cancellation orders in our estimates, we are putting our earnings estimates under review pending further clarifications with the management. Meanwhile, we are maintaining our target price of 68 cents based on 1.0x FY09 price/book and our 'sell' rating,' she said in a morning note yesterday.
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