Singapore Govt increases its stake in ABC Learning Centres ::

Date: February 29, 2008
Source: AM – ABC.net.au
Reporter: Peter Ryan

PETER CAVE: The troubled childcare operator, ABC Learning, is likely to be broken up despite yesterday's positive news that the Singapore Government's investment arm will increase its stake to 15 per cent.

But serious questions are still being asked about the dumping of the company's stock by three directors, including its founder, Eddy Groves, who had their margin loans called in.

Fund manager, Roger Montgomery of Clime Capital, is one of many market watchers who now believe that margin loans used by directors need to be fully disclosed, as he told our business editor, Peter Ryan.

ROGER MONTGOMERY: I think that there is merit in directors disclosing when they have borrowed money to buy shares, simply because it can appear to investors that if a director buys shares, that things are going well and that the director has a lot of faith in the company. That's one of the things that a lot of investors look for when buying into companies - are the directors large owners and have they recently bought more?

But if the director is borrowing money from someone else to buy those shares, using someone else's money to do that, well there may be … might be a lot less risk for them in doing so, yet the appearance is that things are going well.

And so in that regard, I think there's merit in shareholders knowing that they've borrowed money to do that, and the terms on which they've borrowed.

PETER RYAN: So in that case, what do you think about the scenario where we've had three directors of ABC Learning, including Eddy Groves, being in the situation where they're selling shares on Tuesday and even one case where one of the directors sold two million shares on Friday before the disappointing profit result?

ROGER MONTGOMERY: If they were forced by margin sellers to sell, those shares would have been sold out from under them and they wouldn't have had a lot of choice in the matter. My understanding is that there's some dispute as to whether or not they were actually sold by margin sellers or whether it was something he did of his own accord.

If it was something he did of his own accord, then it doesn't look good. If it was sold out from under him by a margin lender well, you know, he may not have had a lot of choice in the matter.

PETER RYAN: How damaging has that been in what is a very volatile market?

ROGER MONTGOMERY: If the business is performing well, the directors are never going to get into that situation in the first place? If the business isn't performing well, then it's going to be an issue. It goes back to the quality of the business and the quality of management and quite frankly, ABC's business performance never justified its price, and that's why directors find themselves in this position.

PETER RYAN: Do you believe that ABC Learning will eventually be broken up and sold to parties that are now circling?

ROGER MONTGOMERY: I think some assets will have to be sold because they have been overpaid. Eddy made the comment in … at the media briefing a couple of days ago that he can't understand why the shares have been savaged when he's got such great assets. The issue is not whether the assets are any good, the issue is that this particular entity may have paid far too much.

And in fact, if you look at the numbers that are being produced in the latest half-year result, it seems that he did pay too much. And so the issue isn't the quality of the asset, it's what you pay for those assets. It's a very simple rule in investing: the higher the price you pay, the lower your return.

And the returns for ABC have been declining for five years, suggesting that he's been paying too much for assets. The lesson is, don't buy businesses that are declining in value.

PETER RYAN: And as far as companies that are overvalued at the moment, do you think that ABC is on its own?

ROGER MONTGOMERY: No, no absolutely not. There's some other examples at the moment that have a similar profile in terms of their return on equity or their decline in profitability, and some of them are very, very large companies that are trading at double what the business is actually worth.

PETER CAVE: Roger Montgomery of Clime Capital speaking to our business editor, Peter Ryan. As part of his own disclosure, Mr Montgomery says that Clime has never bought or sold ABC Learning shares.

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