Defensive Advantage should come straight

Friday 30th November 2001

When some people make a mistake that hurts others, they apologise. Others try to make out that the damage wasn't so bad and maybe they didn't mess up at all.

E-commerce company Advantage Group's latest report falls into the second camp. This is a company that rode the technology bubble with a vengeance and aggressively hyped the potential of the new economy. Like most others of its ilk, its share price fell nearly 90% from its pre-crash peak.

This year has seen the results of that bursting bubble. The Advantage report shows a $60 million write off on assets worth considerably less now than what was paid for them. Add another $6 million in abnormals, mainly losses on the sale of assets or restructuring costs, and the company recorded a net loss of $65.9 million. This is a far cry from a $3 million profit reported the previous year.

Fair enough, some might say. Leading edge technology is a high-risk business and success is difficult to achieve.

However, Advantage prefers to gloss over its past shortcomings with fancy terminology and attempts to turn negatives into positives.

An introductory overview stresses that Advantage "is a pioneer in a fast-paced and changing environment. Pioneers, by definition, are leaders of change, reaping both the benefits and pitfalls of their endeavours."

Chairman Evan Christian rightly points out that the tech bubble has burst, the Nasdaq has fallen by more than half and many tech companies have gone under. Then he adds, "This market reaction stems from major shifts in demand for technology services and the types of services offered."

Really? That doesn't sound nearly as bad as a speculative bubble that caught companies up as much as individuals.

Chief executive Tony Bradley, recently appointed to mop up the mess caused by overly acquisitive former managers, also seems to have avoided any temptation to paint things in black and white.

Claiming Advantage has been "re-positioned to build value" he notes the company "initially grew via a period of significant acquisition-led growth, followed by right-sizing and restructure as the downturn took hold.".

A full-page graphic doesn't say the company hawks a range of eftpos systems and e-commerce services but states somewhat grandly, "Advantage spans the continuum throughout the enterprise lifecycle."

This is a shame because if you take away the contrived language, you are left with a powerful story. A top technology company loses its shareholders' funds on overly expensive assets, yet survives when many others do not and begins to build itself up again.

The report shows Advantage made a modest operating profit in the year to June and, impressively, stayed marginally cashflow positive.

Thanks to $14 million worth of new shares issued during the year, it finished up with a positive figure for shareholders' funds of $6.3 million, although this is hardly a conservative gearing when total assets stand at $33.7 million.

Interest-bearing debt is relatively low and creditors and debtors are balanced. Although the report studiously avoids giving any forecasts, there is a sense that Advantage has recovery potential.

One unusual note to the accounts relates to employee loans. Advantage has given $915,000 in interest free loans to employees so they could buy its shares.

This is not unusual but the report also states "a provision of $615,000 (2000 $nil) has been taken up this year to allow for the reduction in share price from the time of issue of the loans to balance date."

A provision suggests the company does not expect or intend to recover most of what it lent. This deserves more clarification considering the provision represents a 10th of shareholders' funds, whose investments were not made on such beneficial terms or given such apparently impressive protection against loss.

This report shows a company that is sensitive about having performed so badly for its stakeholders but does not yet have the maturity to be straight with them.

That's a pity because, until it develops a reputation for open and honest communication, Advantage is going to find it hard persuading people to believe the good news when it inevitably comes.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. Web: www.mcewen.co.nz, Email: davidm@mcewen.co.nz

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