No candour coating for RMG's bitter pill

Friday 31st August 2001

Welding together 22 companies simultaneously was never going to be an easy task. Since listing in June last year, RMG, the receivables management group backed into the old Frontier Petroleum, has not seen its shares at much higher than its 35c launch price.

But given last week's big loss announcement they've been holding up remarkably well. It may be the Eric Factor - many punters think Eric Watson's Cullen Investments, which holds a 20% stake, can do no wrong.

Or maybe it's the reputation of chief executive Jim Boult who has not been shy about telling RMG shareholders about his role in Baycorp's recovery from near-disaster to star performer.

Given RMG's market niche - it doesn't overlap much with transtasman giant Baycorp Advantage - the growth prospects for its market, and the recession-resistant nature of its business, it's a stock that should repay patience.

But investors should be wary of overly optimistic projections. A year ago broker DF Mainland forecast a June-year profit of $A8.1 million before goodwill writeback. Last week's outcome on the same basis was a $A9.1 million loss.

That no one appears to have seen this coming exposes a candour deficit at board level that won't stand the company in good stead in the future.

RMG's Stock Exchange notices earlier year gave the market few clues about the state of things to come.

On March 29 RMG advised the market that "the integration of the various businesses is substantially complete and all one-off restructuring costs have now been provided for."

Since December 31 the company had traded profitably and was "focused on delivering results consistent with its budget in both revenue and profit."

The balance sheet and projected operational cashflow would strengthen over the next six months. The outlook remained "very positive."

This glowing self-portrait hadn't dimmed by May 2 when RMG reported "improved results as the positive impact of the rationalisation process is becoming apparent."

The quarter "produced revenue of $A15.5 million and unaudited earnings before interest, tax, depreciation and amortisation (Ebitda) of $A1.3 million."

Things then apparently began to move pretty fast.

On May 23 chief executive Paul Cooney, who came to the group as the chief executive of the largest of RMG's Australian acquisitions, retired "to pursue personal investments and other interests" and Boult took over the top executive spot.

At the annual meeting on June 15 chairman Anthony Hodgson admitted the costs of integrating 22 smallish companies had been far larger than envisaged in the prospectus.

But his speech gave the distinct impression those problems were in the past and he painted a rosy picture of the company's future.

Then he handed over the rostrum to Boult, who paid the customary lip service to RMG's staff, "our most important asset." He went on to warn RMG hadn't harvested the operational efficiencies the roll-up had promised.

His job would be to "wring out" higher profitability, partly by making sure operating costs fell continually as a percentage of revenue.

If any shareholders got those lightest of hints the share price showed no sign of it. They got a rude shock less than six weeks later, on July 24, when RMG announced it was laying off 150 of its 750 "most important assets" and would take a big hit to its balance sheet.

On August 19 it announced a $A10.7 million ($13.4 million) bottom-line loss for the June half-year.

It blamed a one-off $A6.4 million restructuring provision and a $A2.5 million revaluation. But things hadn't been running well at the operating level either.

The operating loss before abnormals and tax was $A4.1 million. Ebitda for the six-month period had slipped to just $A200,000, from the $A1.3 million reported for the first three months. How that happened is a bit of a mystery given revenues had held up.

Nor was it explained how the picture had deteriorated so badly since the annual meeting, which came only two weeks before the period's end.

Far from strengthening, as promised on March 29, operating cash flow was negative $A3.2 million.

Had the company not raised $A8.8 million of fresh equity the balance sheet would have been looking pretty dodgy, too. Accumulated losses now total $A34.5 million. Of shareholders' funds of $A60.9 million, $A58.8 million is goodwill.

Explaining the red ink Boult said it became clear "after a review of the June-quarter result" that the company's cost structure was unsustainable.

But in the absence of any explanation of how earnings disappeared between the March and June quarters investors can't be sure his surgery has done the trick.

Boards shouldn't be beaten up just because things slip out of their grasp for a while.

But their credibility takes a severe denting when they stand up before shareholders and keep major problems up their sleeves.

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