ABS a.b.c. learning centres limited

simple reasons

  1. 5,527 Posts.
    EITHER ABC Learning is totally misleading the market or the child-care centre operator's shares were an historic buying opportunity yesterday, when they fell from $3.74 to a low of $1.15 in frantic trading before buyers ran them up to a close of $2.14.

    The December-half profit ABC posted late on Monday betrayed earnings pressure. After-tax earnings were down 37 per cent and earnings quality was low, with contributions of $26.2 million coming from liquidated damages paid by developers for non-performance on contracts, and another $51 million of revenue booked as a surplus between the book value of a British child-care group and the price ABC paid for it.

    Operating cash flow went from plus $27.1 million to negative $19.8 million, and the result was weighed down by a leap in finance costs from $22.2 million to $80.6 million. There was a $17.8 million one-off payment on December's consolidation of $1.43 billion of bank debt with a syndicate that includes Australia's big four banks.

    But interest payments were also up from $18 million to $62.8 million as ABC digested aggressive expansion into the US and British child-care markets.

    ABC reported shareholders equity of $2.23 billion at December 31. But the group counts intangible assets of $3.06 billion that have been built up by multiple acquisitions, and the interim profit represented just 1.7 per cent of stated funds employed.

    The result was ugly, in other words, and the market reaction was magnified by the knowledge that the slide would almost certainly trigger margin calls and share sales by investors, including founder Eddy Groves and other ABC directors.

    Reports in the market that the share price plunge would put ABC in breach of a $2 billion market capitalisation covenant imposed by the banks were rejected by ABC, which says the $2 billion limit relates to assets minus liabilities, plus $600 million in unsecured convertible notes issues in mid 2007. That total was $2.8 billion at December 31 - but ABC is now valued by the market at just $1 billion.

    So it's tight, alright. But ABC also insists that it is not only profitable but on track to boost earnings by 15 per cent in the full year when, it says, 75 per cent of earnings before interest, tax and depreciation are earned in the US, as well as 60 per cent of Australasian earnings and 65 per cent of British earnings.

    It's arguable that ABC should not have traded yesterday, as rumours swirled. But it did - and an astonishing one-third of the company changed hands, with retail investors selling heavily. The shares closed at $2.14 and, if ABC's guidance is real, the buyers are set. It's that simple, underneath the complications.

    �¡ �¡ �¡YEARS of outstanding growth in revenue and profitability have set the bar very high for Woolworths chief executive Michael Luscombe and the question being asked in recent months was whether he could clear it. Yesterday he did, by the financial equivalent of a country mile.

    The retail group's 20 per cent December-half lift in earnings before interest and tax, 28 per cent jump in post tax earnings and 26 per cent increase in earnings per share sends a tough signal to Wesfarmers' boss, Richard Goyder, who would love some competitive breathing space as he tries to get the group's new Coles retail arm back into the game.

    Goyder will not get the oxygen he wants. Luscombe is driving a business that is accelerating, not decelerating as some had believed, and he is expanding the Woolies formula of investing for growth.

    Woolworths is extracting sensational returns from a low yield industry. In the December half, the group's supermarkets boosted same store sales by 6.8 per cent, expanded its gross profit margin by 35 basis points to 23.69 cents in the dollar, and cut its cost of doing business by 14 basis points, to expand earnings before interest and tax as a percentage of sales by 53 basis points, to a 5.74c in the dollar.

    Earnings before interest and tax expanded by 19.3 per cent and the gap between that improvement and the lower 6.8 per cent same-store sales increase (or the 8.1 per cent increase including new selling space, for that matter) is telling: it demonstrates, as Luscombe noted yesterday, that Woolies is getting its margin expansion much more from

    cost efficiencies than from higher prices.

    For more than eight years Woolies has been reinvesting profits into its businesses through Project Refresh. The process delivers both lower point-of-sale prices and process improvements, in the supply chain in particular, and they, in turn, are generating profits for the next reinvestment cycle, which will expand to include New Zealand, the liquor outlets and Big W.

    Capital expenditure will rise by $500 million this year to $1.8 billion as the group ramps up store refurbishments and openings and supply-chain improvements, including stock forecasting tools that have cut wastage losses on fresh food from about 15 per cent a decade ago to the high single digits.

    It all means that Woolies is a difficult target as Wesfarmers attempts to reclaim lost market share for Coles. Pricing is not a chink in its armour, even after the group's decision to respond to customer complaints by eliminating differential pricing in its supermarkets across the nation.

    Done badly, that change could have left Woolies exposed to selective discounting. But Luscombe claims to have achieved uniform prices by bringing higher prices down to the lower ones. The cost, he says, was considerable. He won't say how much, but whatever it was, margins expanded anyway.

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