----- Original Message -----
Sent: Saturday, June 23, 2001 7:38
PM
Subject: [sharechat]
....BCH.........CLH.........RMG../ Mike G.
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.
See IRG research reports
