Like a man on death row – Allco seems close to death, but no-one has the heart to tell the victim.

Allco’s half-year results, announced yesterday, look relatively tame on their face. Earnings dropped marginally from $97 million to $84 million and operating cash flow was negative, but as the market has attested, past earnings are the least of Allco’s problems. Allco scrip has slumped since reopening yesterday and has now fallen from more than $13 last March to 84 cents. Investors aren’t totally stupid, earnings can be deceiving, Allco’s results would have been far worse had it chosen to mark-to-market its stake in Allco Equity Partners, which is in Allco’s books at its supposed NTA of $5.53 per share (rather than its market price of $2.37).

Staggeringly, Allco also chose to wait until yesterday to disclose that its bankers have the ability to call in $900 million in debt facilities in 90 days. In its wisdom, Allco determined that disclosure wasn’t required back on 9 January when Allco’s capitalisation actually slipped below $2 billion and the review clause was triggered. Allco claimed that it received “legal advice” noting that disclosure wasn’t required. One suspects that the legal advice was obtained after Allco asked its lawyers, “How can we avoid disclosing this?”

ASX Listing Rule 3.1 (subject to several carve-outs which wouldn’t apply to Allco here) states that:

Once a listed entity becomes aware of any information concerning it, that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.

How any lawyer could determine that a clause has been triggered which gives creditors the option to call in a $900 million loan isn’t information that would have a material effect on the share price is completely bemusing. The fact that Allco shares slumped more than 60 percent yesterday after disclosure was made proves that the debt situation was at least a little material. Action must be taken against Allco’s directors for this. Question marks also need to be raised against whichever top-tier firm provided the sage advice.

Non-disclosure aside, what is especially concerning for Allco’s future is the comments of its conflicted auditor, KPMG, The firm appears to have given up hope of performing non-audit work for Allco (which totalled more than $2.9 million for Allco and $1.2 million for AEP for FY 2007) and has undertaken a splendid example of backside-covering. Even though KPMG was merely conducting a review of Allco’s mid-year numbers (a review is substantially less in scope than an audit) it produced almost two full pages of caveats. While not “qualifying” its opinion, it came awfully close to doing so.

KPMG noted that Allco was currently “in the process of renegotiating the terms, conditions and maturity of its corporate financing facilities [and] the existence of this uncertainty may cast significant doubt about the Group’s ability to continue as a going concern.” (Emphasis added).

KPMG didn’t stop there, it also noted that Allco “has initiated a strategic business review where by certain non-core assets will be realised and restructuring costs will be incurred…the quantum of losses associated with the assets sales and costs of restructuring cannot be presently determined although they are likely to be significant.”

KPMG finally stated that Allco’s “goodwill balance of $1,301 million and the intangible management rights balance of $176 million…have suffered material impairment. The quantum of the impairment cannot be determined.”

Just to summarise – KPMG found that nothing in its review caused them to believe that Allco’s numbers aren’t correct, but you should know that the company may not be able to continue as a going concern, it will lose a bundle flogging off everything that isn’t bolted on and its goodwill is pretty much worthless.

Peter Fray

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