Why Have Shares of Cosco Corporation (Singapore) Limited Plunged By 17% Today?

Shipbuilder Cosco Corporation (Singapore) Limited  (SGX: F83) just resumed trading of its shares this morning. The company’s shares have been suspended from trading since 11 August 2015.

But, it looks like a poor restart as Cosco Corporation’s shares are currently trading at S$0.31, down by 17.3% (as of 12:55 pm) from its pre-suspension level of S$0.375 per share. What’s going on here?

The trading stop

The suspension was due to a possible merger between Cosco Corporation’s parent company, the COSCO Group, and China Shipping Group. But, Cosco Corporation was eventually informed that it will not be involved with the merger and its listing status is thus not affected.

The crash

So, why then did Cosco Corporation’s shares fall sharply today? A possible reason could be a profit warning that the company released last Wednesday while its shares were still being suspended from trading.

As stated in the profit warning, Cosco Corporation  is expecting a significant net loss for the last quarter of 2015.

In the first three-quarters of 2015, Cosco Corporation’s net loss already stood at S$158 million, of which S$86 million is attributable to shareholders. In the third-quarter, the company even fell into negative gross margin territory, meaning that its revenue is below its cost of production.

Cosco Corporation has been generating negative cash flow from its operations for the past five years, with the cash burn even accelerating. To the latter point, Cosco Corporation’s cash flow from operations had fallen from a negative S$265 million in 2010 to a negative S$1.4 billion in 2014.

In what appears to be a move to keep its business going, Cosco Corporation has been taking on more debt. This can be seen in how the company’s debt to equity ratio has increased from just 55.3% in 2010 to the current 287% as at 30 September 2015.

With a rise in interest rates in the near future looking increasingly likely, it seems unclear how Cosco Corporation can survive unscathed for prolonged periods of time, especially with the shipbuilding industry currently in shambles.

To add fuel to fire, these aren’t the only issues troubling Cosco Corporation. The company is also grappling with ballooning accounts receivables; that’s something my colleague Chong Ser Jing had warned about a few months back.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own shares in any of the companies mentioned above.