As investors digest allegations against Sino-Forest Corp. and a 21 per cent plunge in its stock, the forestry company must fully address the issues being raised, RBC Capital Markets says.
"We believe that the key question for shareholders remains Sino's ownership of trees. Clear disclosure of the company's plantation purchases, sales, and the long-term master agreements, preferably by a third-party source, is warranted," analyst Paul Quinn wrote in a research note.
The note came after trading in the stock was halted in Toronto on Thursday, and an obscure U.S. firm called Muddy Waters Research alleged that Sino-Forest inflates its revenues and evades scrutiny by operating under such a complex structure that it is almost impossible to trace how cash is moving through the company.
The company did not return calls requesting comment and has not provided a statement to the market about the allegations. Bloomberg News reported that the company has set up a special committee to deal with accusations it overstated its timberland holdings and production.
RBC's Mr. Quinn said Sino-Forest would do well to clear the air.
"We also expect that investors require that the company fully address the issues raised in the Muddy Waters report. We believe that the allegations are very serious and significantly increase the uncertainty associated with the company. We await comment from Sino-Forest regarding the Muddy Waters report and the company's strategy to restore investor confidence," he wrote.
Mr. Quinn rates the stock "outperform," with above-average risk.