Why Did The Cogstate (ASX: CGS) Share Price Crash?

The last few weeks have been a wild ride for Cogstate (ASX: CGS) shareholders. The Cogstate share price has dropped from $2.32 to $1.24 in just one week.

Until recently, Cogstate was guiding that it would achieve EBIT margins of 20% – 24% in FY 2023. Furthermore, it said it had more than US$35m in pre-contracted revenue, expected to run off in FY 2023. Conservatively, this indicated at least US$7m in EBIT, or $10.2m AUD, and the consensus of analysts per S&P Cap IQ was that EBIT would come in over $14m AUD.

As you can see from the price and volume chart below, the Cogstate share price had been rising on increased volume, in the lead up to its peak on Friday, February 17, 2023. Then, on Monday 20th, we saw the Cogstate share price plunge over one-and-a-half trading sessions, until the ASX put it into trading halt.

After a few days of suspended trade, we now discover, thanks to the ASX, that:

The Company [Cogstate] has recently been in discussions with a third party in relation to a potential control transaction with respect to the Company. These discussions substantially commenced in late December 2022, with access to due diligence granted in late January 2023. At all times, the Company considered that the discussions were and remained confidential, non-binding, incomplete and insufficiently definite to warrant disclosure. On 18 February 2023, it was determined that the potential transaction would not proceed, and accordingly, all such discussions have ceased.”

Unfortunately, for shareholders such as myself, Cogstate has also released a downgrade to its guidance, due to the timing of the execution of contracts, because “the rate of [clinical trial] enrollment will not catch up to the initial projections provided by Cogstate’s customers.”

EBIT margins were downgraded from “20% – 24% of revenue” to “6 – 8% of revenue”. And FY23 revenue is now expected to be approximately 6% – 9% below FY 2022. In FY 2022, EBIT was US$10.5m on revenue of US$45m. Today’s updated guidance implies revenue of US$41.625m and EBIT of just US$3.15m in FY 2023, at the midpoint, well below market expectations.

Furthermore, it said its Cash balance as at 31 December 2022 was $29m, which is below the $30.6 million it had at June 2022. However, Cogstate says shareholders can “expect positive operating cash flow for 2H23.” 

None of this article is intended as expressing any opinion on the facts described above, I simply felt I should outline the series of events that contributed to the large change in the Cogstate share price over the last few days. 

Disclosure: the author this article owns shares in Cogstgate (ASX: CGS) and will not trade Cogstate shares for 2 days following the publication of this article. This article is not intended to form the basis of an investment decision. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).