Trio get to grips with sudden falls in asset value

Friday 24th August 2001

Several shareholders in Advantage Group who were allotted stock in the year ended June 30 have seen substantial losses if they still hold.

Advantage issued 6.52 million shares in the period at prices ranging from 46c (439,500 shares) to $3.50 (2.05 million shares).

The stock would have been issued for a variety of purposes, including acquisitions, possible exercise of options and for other reasons.

In the case of options, for example, the company issued 364,750 in the latest year, with an exercise price of 97c and the expiry date of June 1, 2005.

There is plenty of time before the holders must decide whether to exercise their options or let them lapse, so Advantage's share price could be at or above last week's closing price of 40c.

The price fell 12c on Friday after the company reported a deficit of $65.89 million for the year including $66.73 million of unusual items, of which amortisation of goodwill accounted for $60.37 million.

Investors may lift the price again after full analysis of the result, but there is a long way to go even to the 2001 high of $1.69, or the high/low range of $6.65-1.19 of 2000.

Irrespective of the current situation, the result and the decisions to take up so much in unusual items could be contrasted with the company's interim report for the six months ended December.

It announced (on March 1) a net profit of $386,000 with an operating profit of $2.3 million. Non-operating profit was $1.48 million and goodwill write-offs were $3.06 million.

Operating profit was $200,000 for the full year, so there was a turnaround of $2.1 million in that performance measure.

The goodwill writeoff followed a full review of the business. It was decided there was no certainty of the carrying value of goodwill and therefore goodwill assets were written off.

Since goodwill is the difference between what was paid and the book value of the tangible assets acquired, a drop in the "worth" of a subsidiary, as perceived in the particular industry, can result if there are substantial adjustments to goodwill.

Advantage's problem seemed to be that the change in value, or realistic disposal prices, happened suddenly, a point managing director Tony Bradley made when he said technology stocks worldwide had been re-rated.

Mr Bradley said "billion-dollar losses posted recently by Lucent, Cisco and Nortel reflect the difficulties in the technology sector globally.

In Australia, OneTel has gone into receivership and in New Zealand so has Telemedia.

"The market has changed and so has the environment in which we operate over the past year. Advantage has not been immune to these changes and we have responded."

While some people might say it was about time, given regular optimistic comments over the past 18 months.

Advantage was not alone in having to deal with sudden falls in asset values, with a consequent effect on share prices, nor is the issue confined to the technology sector.

Healthcare provider ElderCare had a net deficit of $8.1 million for the year ended May, compared with a $5.5 million profit in the previous year. The result was expected, having been signalled at the 2000 annual meeting and in the interim report.

Unusual items of $7.36 million arose from a loss of $1.96 million on sale of an investment in credit services group RMG and another investment, and $5.4 million of writedowns and realised losses on its property portfolio, including land initially held for retirement village development activities.

Eldercare intended concentrating on the wider healthcare market.

The asset disposal/rationalisation programme to cut its non-core businesses had a spin-off to the company's debt, which went from a peak of $49.3 million to $41.2 million at year-end.

Changes to asset valuations this year were not confined to the smaller companies nor to small amounts.

Fletcher Forests said in June it made accounting policy changes that would reduce the carrying value of its forests from $1.8 billion in the former Fletcher Challenge group accounts to $1.1 billion, the difference arising from different interest capitalisation policies at the group and divisional levels.

Fletcher Building had earlier said its accounts would have unusual items of $15 million for two situations and between $70 and $100 million in writedowns in the carrying values of other assets.

Those amounts were in addition to other substantial amounts disclosed in Fletcher Building's information memorandum when the old Fletcher Challenge letter stocks were changed to standalone companies.

Writeoffs and other unusual items affect a company's share price but do not necessarily undermine the potential operational performance on which the share price's level should ultimately depend.

They obviously affect a price negatively if they become large enough to wipe out shareholders' equity or create doubt about the enterprise's capacity to continue as a going concern.

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