Published April 20, 2009

AGM WATCH

Order cancellations key issue at Cosco (S'pore)

Shareholders also fear share issue mandate could lead to rights issue

By VINCENT WEE

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AS Cosco Corp (Singapore) continues to weather an extremely challenging year for the shipping and shipbuilding industry, it's annual general meeting today should be an interesting affair as shareholders are likely to want some good answers as to how the fortunes of a one-time S-chip favourite could have slipped to the point where it barely treads water above penny stock status now.

In rough waters: Shareholders would want answers on how a one-time S-chip favourite could have slipped to barely above penny stock status now

Prime among shareholders' concerns must be the spate of order cancellations and reschedulings that have come up in the past quarter alone and which look likely to be a continuing trend as the beleaguered industry continues to wallow amid a global slowdown in trade and weak oil prices.

Another worry, which is also a sign of the current conditions, would be if the usual seeking of a mandate to issue shares and/or convertible securities is a precursor to a rights issue.

Cosco has not said it is in need of capital. But it has announced several expansion plans recently, such as the securing of land utilisation rights in Qidong, Jiangsu province that is meant for expansion of its rig-building facilities which it announced in March. Investors will want to know if all these plans are going to translate into some potential cash calls in the year ahead. Other queries may centre around the financial statements and revenue recognition policy that the company adopts. Cosco has run into problems in the past when it announced contracts that were subsequently cancelled, which have in turn adversely affected its share price. Cosco went on to change its policy to only announce newbuilding contracts after the first instalment has been paid.

However, the order reschedulings over the past few months will raise questions as to how accurate even this policy is when it comes to assessing the stability of revenue flows. In addition, the shipping industry has been rife with talk of ship owners cancelling orders despite having to take hefty penalties. The spectre of ship owners going out of business also looms on the horizon.

Finally, Cosco's previously lucrative dry bulk shipping business will also likely come into focus as the sector goes through a prolonged slump. There had been talk of Cosco selling the business earlier on, which it deferred because it was still yielding good profits then. Attention may now be refocussed on possible divestment plans.