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Market dogs bark but few deliver

By Peter V O'Brien

Friday 25th July 2003

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The 17 companies whose shares sold at less than 30c last week were either dogs in the eyes of most investors or undervalued bargains in the view of their, presumably biased, directors and executives.

Data on the 17 is in the table, which excludes miners. It was hardly surprising that eight of the 17 had connections with technology.

They have struggled on, recording losses or minimal profits and always seem to be about to turn the corner. The market thought otherwise, despite the optimism seen in interim and annual reports.

Meat processor Affco has long been an enigma. While the share price last Friday was 1c below its year-long high, it was almost twice the low over the same period.

Meat stocks are notoriously volatile. Affco needs a solid record of good profits, relative to the company's size, before investors will re-rate the stock.

An interim profit of $10.8 million for the six months ended March 29 was a strong recovery from the $14.7 million loss recorded in the corresponding period of the previous year. It was earned on shareholders equity of $157.07 million, including minority interests in subsidiaries.

An annualised return of 13.75% on shareholders equity would be a good outcome for the full year, assuming the company earned another $10.8 million, at least, in the second half.

Affco is up against a relatively strong New Zealand dollar, but the interim report said the company had "positioned itself well" for the second half, while acknowledging the industry's commercial realities.

The technology-related companies in the table ­ Beauty Direct, Cadmus Technology, Cube Capital, IT Capital, Newcall Group, Provenco, RMB, Strathmore Group and Training Solutions (formerly E-cademy) ­ have regularly announced business developments.

Strathmore Group has problems and recently signed a compromise with unsecured creditors which imposed a moratorium of six months on them taking any enforcement action. The moratorium will allow directors time to seek another business which could be "backed into" Strathmore. We will see.

Payment solutions and data management services provider Cadmus Technology's report for the nine months ended March 31 said the company had an unaudited "operating profit" of $1.19 million for the period, a 177% increase on the corresponding period of the previous year.

The market got a one-liner down the report: "After depreciation and interest, the result was a net deficit of $259,000."

At least that was well down on the $1.48 million net deficit recorded in the corresponding period but it raised the perennial question ­ why companies try to put a gloss on results when they have fund erosion.

Cadmus spent a lot on developing market share and systems, which could pay off in future, but the company, like many others involved in technology, should remove the hype about tomorrow and be realistic about today.

IT Capital is "sort of" involved in technology, although it is difficult to work out where the company is going, if anywhere.

A rights issue was announced on July 10 in a 1:1 ratio at 0.165c a share. It will raise $500,000 of new capital and will be underwritten by directors David McKee Wright and Maurice Bryham at no fee. "The successful completion of this rights issue will see ITC able to support Sealegs International with business development funding. ITC anticipate (sic) that this offer will be made in September 2003 after the annual general meeting of the company."

It is hardly outrageous to suggest Messrs Wright and Bryham could be picking up a shortfall, to add to their current holdings and new shares and consolidate their effective control of the company. A share price of 0.9c would seem to show investors' assessment of IT Capital, particularly as there are apparently existing alternatives to the Sealegs system.

The 17 seemingly low-priced stocks are roughly 10% of local-based NZSX listed organisations.

It is legitimate to ask why some of these strugglers clutter up the list, when they could be either wound up (giving shareholders something) or privatised.

On the other hand we could get a shock if a couple came through and got profitability commensurate with their funds.

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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