Crikey’s business report card: balancing the books
Adam Schwab writes:|
Jun 27, 2008 12:00AM |EMAIL|PRINT
As the financial year draws to a close, it has been reported that many superannuation funds are “poised to post their biggest loss in 20 years after being rocked by falling stock markets [with] falling markets have wiped an estimated $50 billion off the value of workers’ retirement savings.”
Unlike many investment funds, at Crikey we often look at companies from a corporate governance perspective. This isn’t necessarily a common theme amongst investors. A lot of executives dismiss corporate governance as nice in theory, but irrelevant to the running of a company (ignoring the fact that “corporate governance” is a fancy term for putting shareholders first).
We don’t calculate discounted cash flow models, nor do we listen to long sales pitches from managing directors. Crikey takes a simper approach — analysing public documents like financial and annual reports or to determine a company’s sustainable cash flows, the quantum of any related party transactions and look for signs of executive greed — all indicia that all is not what it seems.
Like US financial mag Forbes, below is a list of companies and indices which Crikey have looked at in the past 18 months and their subsequent performance. Funnily enough, companies with poor governance practices also seem to deliver substandard shareholder returns. But you probably already knew that.
What we said: Run overpaid for advisors on its IPO, shelling out more than $20 million to raise a mere $80 million.
What’s happened since: Run shares have dropped from 80 cents to only 4.3cents — a fall of more than 95% while its initial CEO and Chairman departed.
ABC Learning Centres (December 2006)
What we said: Crikey questioned the acquisition of child care centers in the US from private equity firms and noted that ABC become less profitable as the company grew.
What’s happened since: ABC shares have slumped by 88% to around $1. ABC’s sold most of its US child-care centers back to a private equity firm and is in the process of selling its UK vouchers business. “Celebrity CEO” Eddie Groves has seen his equity holding drop from more than $300 million to nothing.
Telstra (January 2007)
What we said: Telstra appears overpriced trading on an earnings multiple of 16 despite facing tough competition.
What’s happened since: Telstra’s share price has held up well amidst market turmoil. CEO Sol Trujillo overcame doubters like us by delivering on its 3G promises and increasing margins. However, TLS is not completely out of the woods with the company trading on a lofty earnings multiple and facing competition from VOIP and naked ADSL.
Uranium King (January 2007)
What we said: Junior uranium miner Uranium King’s sudden share price spike (up 65%) to 76 cents was reminiscent of the Poseidon boom.
What’s happened since: The uranium price slumped, taking with it junior minors like UKL. UKL‘s share price slid 58 percent since Crikey’s article but the company now appears to be heading in the right director overcoming issues with delinquent director, Karl Myers.
Macquarie Bank (May 07)
What we said: Noted legendry short-seller Jim Chanos’ views on Macquarie appeared to be correct and questioned Macquarie’s model of overpaying for assets and selling them to satellites.
What’s happened since: Macquarie shares dropped by more than 44% from around $90 to $49 after being buffeted by the credit crises and concerns about the viability of the “Macquarie Model”.
Consolidated Minerals (June 2007)
What we said: Claimed that a takeover offer (of $2.82 per share) undervalued ConsMinbased on its holdings in other listed companies and the rampaging manganese price.
What’s happened since: A bidding war erupted and ConsMin was eventually purchased by Ukrainian oligarch Gennadiy Bogolyubov who won a bidding against Brian Glibertson’s Palmary Resources - eventually paying $5.00 per share.
Fairfax (July 2007)
What we said: Fairfax and MacMedia’s purchase of Southern Cross Broadcasting looked like the media boom of 1987 all over again.
What’s happened since: Fairfax shares are down 39% while MacMedia’s shares have dropped by 31%.
API (July 2007)
What we said: Criticised API for its botched purchase of home-wares franchisor House.#Later noted API’s poor operating cash flows and misleading claims made in its Annual Report.
What’s happened since: API share slumped by more than 50% as investors lost faith in the pharmacy wholesaler and retailer.
What we said: The Australian market appeared to be defying reality, by rising despite the US entering a recession and oil prices skyrocketing, giving rise to stagflation.
What’s happened since: The All Ords has dropped from 6400 to around 5400 — a fall of more than 15% — largely on fears of a slowing global economy and skyrocketing oil price.
Consolidated Media (November 2007)
What we said:James Packer had found his “patsy … in the usually shrewd” private equity firm, CVC Asia Pacific who purchased 75% of Consolidated Media (while Packer’s interest was whittled down to only 10%).
What’s happened since: ConsMedia shares have dropped by almost 25% since splitting from PBL due to poor ratings and a slowing economy weighing down media stocks.
Flinders Diamond (November 2007)
What we said: We claimed that Flinders’ share Price increase from 1 cent to 8.9 cents in a day sounded too good to be true given the company hadn’t drilled any holes and had only announced an inferred resource.
What’s happened since: Flinders has rocketed to 22 cents and proved us very wrong.
PetroChina (November 2007)
What we said: PetroChina represented the face of China’s share bubble being valued at 30 percent more than Exxon but earning less than half of Exxon’s profits.
What’s happened since: The PetroChina bubble well and truly popped, with its market value dropping by 69% from US$750 billion to US$232 million.
Austock (February 2008)
What we said: Austock will struggle due to its reliance on clients ABC Learning Centres and Timbercorp. The market seemed to be overpricing Austock, with its earning multiple pitched at a 75% premium to Macquarie Bank.
What’s happened since: Austock scrip has crashed from $1.60 in February to only 55 cents now – a fall of 66% in less than five months.
Media Stocks (February 2008)
What we said:Media stocks ”priced as though they are about to enter a period of profit growth, when in actual fact, advertising revenues look like being squeezed in the years to come, with profitability likely to worsen.”
What’s happened since: In four months, of the media stocks named, ConsMedia has dropped by around 28%, Fairfax down almost 25%, MacMedia down around 10%, Seven down 25% and News Corp approximately 14% lower.
Babcock and Brown (21 April 2008)
What we said:Criticised Babcock and Brown’s poor cash position, noted profit performance was helped by assets revaluations and criticized the bank’s remuneration structure.
What’s happened since: Babcock shares imploded, dropping from around $14 to a low of $4.90 last week (and have subsequently bounced back to $6.75).