Australia | Apr 23 2008
By Greg Peel
The firing squad was working overtime yesterday outside ABC Learning Centres ((ABS)) meeting as all of the chairman, two directors and the CFO were dispensed. This followed an announcement which involved two big surprises – the US deal has actually gone through, and earnings guidance was materially slashed.
The first was not an enormous surprise, but analysts were beginning to wonder. As it was, Morgan Stanley Private Equity picked up 60% of ABC’s US assets as flagged but for only US$700m when US$750-775m was expected.
The earnings downgrade was not a huge shock, as analysts agree ABC guidance has always been a complete crock in the past, why would now be any different? But dismay nevertheless resulted from the reason for the downgrade to an expected 17-19cps loss in FY08 from a 34-36c profit as suggested TWO WEEKS AGO. Was this new guidance the result of some huge one-off cost? Or the reduced profit on the US assets?
No. It was all about a fall in Australasian earnings due to poor management of occupancy, poor management of rosters, wage increases of 17% and less than expected increases of parent fees. All in two weeks!
Even though ABC retains 40% of its US assets, FY08 earnings will be almost entirely dominated by the Australasian result. The only good news is that the US sale will result in $432m being paid off debt – a result that greatly de-risks the company. It was this de-risking that prompted speculators to go diving into the shares yesterday.
Macquarie is unmoved at Underperform. The implication is you can’t trust ABC guidance, and an equity raising would have to be very much on the cards. For ABC to pull itself out of its hole it would have to see a “massive rebound” in Australasian earnings at a time when every other part of the Australasian economy is in interest rate and inflation-affected slowdown mode.
ABN Amro took a slightly different tack, suggesting it’s a positive that “recent poor results have now been acknowledged and explained”. Thus on the basis of the de-risking, ABN has upgraded to Buy. However, that does come with a “speculative” warning.
Citi is similarly calling its Hold rating “speculative”, but is hardly providing an inspiring outlook. “What’s left,” says Citi, “[is] a weakened portfolio of centres in Australasia that require turnaround as a result of management inattention, burdened by a heavy debt load which is the unpleasant hangover from the ill-fated foray into the US”.
Someone sure needs to do some learning, and I don’t think it’s the kiddies.