Forum Archive Index - June 2001

["G Stolwyk" <stolwyk@wave.co.nz>]

Mike,

 

You asked me to comment on RMG. I hold shares in BCH and CLH.

 

I have been holding BCH for a number of years and was thinking about selling some of these and buying RMG instead. One can get over 40 RMG shares for 1 BCH share; if there were some good indicators of growth, I would have done so.

 

In my opinion, the status of these companies is, with regard to:

 

1. Cohesion and management culture.

BCH: This company was purposely built from a base. When in the nineties, it lost its way, the core was there but the Board was not focussed, ie buying land instead of debtor files; an unfortunate and expensive attempt to establish a base in Australia.

 

But the man who looked after the operations, Keith G. McLaughlin had a fully functioning unit. The chairman then resigned and mr Boult took over.

 

 And all credit to him that he managed to turn BCH around! We need to remember that this turnaround concerned mainly the top level of management. The Board also shifted HQ to Auckland where the larger market was.

 

RMG: Twenty two firms each with their own culture and level of expertise were somehow welded together to form one company! It was done quickly and presumably, RMG agreed to the managements of the 22 companies to continue.

 

Did they all know about computers? Was there much sophistication? Could a management be sacked if they were unwilling to embrace a new culture? Most likely not, as the contracts would rule that out!

 

Previous owners holding about 74 mill. shares were unwilling to hold their shares in escrow for another year. I guess that some of these holders may not necessarily come up to the required standard.

 

RMG holders may well ask for the true reason why mr Cooney resigned as the CEO. Was he fed up with the slow pace of development and any procrastination, he encountered?

 

I conclude that there is still a lot of work to be done to get the 22 units to work as one body!

 

2. The number of RMG shares on the market.

 

We already know that some 74 mill. shares from the previous owners of the businesses are ready to be sold.

 

Another 40 mill. options will be converted to shares. We then have a massive total of 582 mill. shares, of which 264 mill will be in escrow till June 30, next year.

 

So we have a net 318 mill held by other shareholders! In the meantime, a large portion of this will be traded before June 30, next year, after which the escrow will be lifted and another 264 mill shares will join in as well!

 

Questions: Was there some deal done to convince the previous owners to hold onto their shares? Answ.: I don't know if they were promised any options or whatever, in the future.

 

But, unless something was signed, will they adhere to any agreement?  

 

One answer is, that it is not in anybody's interest to have a market collapse under the sheer weight of available shares!

 

Can the number of shares be cut back on a say 1:3 basis ( ideally, a 1:6 is needed )?

 

Answ.: Yes, one could have say a 1 for three followed a couple of years later by a 1:2 or whatever; unfortunately, unless RMG will have some solid earnings to show, any cutback in the number of shares will backfire and prices will fall.

 

3. The sophistication of the business.

 

BCH : Highly sophisticated. The company aims at a NPAT of a consistent 27% on operating revenue! To do that, it cuts out the commodity levels, where margins are low. Last year, it earned $ 15.7 mill.on an operating revenue of only $ 58.5 mill.!  

 

CLH can expect a NPAT of 17-18% on operating revenue in the year to June 2002.

 

RMG has some  $ 72 mill. intangibles which need to be written off in a reasonable period. That used to be 10 years, I think, but RMG may well need some 20 years. That is $3.6 mill. per year after tax!

 

At present, they don't pay tax and they did'nt write off any goodwill either!   Addional goodwill could be created in the future!

 

To produce 1cent net profit/ share they will have to earn $14 mill. before the normal 33% tax and then writing off $ 3.6 mill.intang.

And before they get to that $ 14 mill, they have to deduct interest and depreciation!

 

At this stage, I can only see them writing off a nominal amount of goodwill or none at all. 

 

RMG keeps quoting EBITDA earnings.    And no wonder!         I am only interested in earnings after EBITDA !

 

RMG also keeps quoting high revenue levels instead of NPAT margins on turnover.

 

The higher than expected revenue levels indicate that RMG is working at the lowest or " commodity level ": Big revenues, high costs, low margins, shortage of skills and/or cash!

 

Both BCH and CLH buy debt ledgers. Liquidation of these can produce much higher margins. They have the cash to buy these.

Sofar, in my opinion, RMG has not shown that they have the cash to do that.

 

Mr Boult certainly has a lot on his mind at present. I wish him luck! But I won't be buying any RMG shares for quite some time yet!

 

Gerry

---

Disclaimer. Readers are not asked to buy, hold or sell BCH, CLH or RMG shares. To do so, will be entirely at their own risk.