Australia | Aug 23 2007
By Rudi Filapek-Vandyck
Lesson number one for any listed company is: you do not simply drop an earnings bomb without previous notification.
Lesson number two: you especially do not drop an earnings bomb without previous notification when a whole bunch of institutional investors has recently joined your share register.
The above two rules will feature high on the agenda of management at young and fast growing high tech company Arasor International (ARR) over the coming days and weeks. No doubt, phones are ringing hot and extra time has to be scheduled in daily routines for company management ahead of the weekend.
Patersons analyst Russell Wright was equally not impressed with Arasor’s ASX-posting this morning. Wright has been a staunch supporter of the company, which was floated last year by Patersons, and remains to date one of the few close expert followers in the local market.
Contrary to previous guidance, Arasor reported today 2007 will not see the company turn profitable, while FY08 will see it reporting a $30m net profit instead. Mixing the bad news with some good news may seem like a good idea, but until this morning all shareholders had been under the impression that the current second half of fiscal year 2007 (Jan-Dec) would deliver a small profit.
The reasons for the change, in effect a deferral of net profits, are being summed up as a $15m adverse product sales mix on top of $4m in temporary bad debt provisions and a $4m additional R&D investment for laser TVs.
That’s all good and well, of course, as investors like it when management puts some extra dough in future growth, while making some extra-precautionary provisions, but what’s with the “adverse product sales mix”?
Russell Wright, no doubt one of the first to have picked up the phone this morning, explains in a note to Patersons clients: “The fixed wireless terminal and CPE equipment supplied to BSNL has apparently been deployed in multi-cities rather than just Bangalore. This has apparently led to slower sales of the higher margin transmission equipment. However, this apparently increases the confidence that ARR management has in achieving such sales in FY08.”
Following the cold shower announcement, Wright has reduced his earnings forecast by 2% for FY08 to $31.3m but earnings for FY09 went up by 14% to $60m. This would imply that Arasor’s net profit is about to double between next year and the year after. This does not take away there is a credibility issue at present. Management is likely to have its hands full in dealing with this for the time being.
To end this story on a positive note, the changes in earnings forecasts have actually increased Patersons’ discounted cash flow (DCF) calculation for the stock: from $8.80 per share previously to $9.15 per share as of today.
The recommendation remains Buy.
Arasor shares were down 6c (2.45%) last time we looked at $2.39. The shares hit a peak of $4.00 in March this year.
All in all this seems like a beginner’s mistake that would not have been expected from such an experienced management team as Arasor’s.