macquarie two dollar price target is a problem, page-11

My last AFG post (one month ago) has proved unfortunately accurate (see first post on this thread).

While AFG management have clearly made big mistakes recently (particularly in buying and overpaying for Rubicon, and in not being more aggressive in lowing gearing levels over the last 6 months when it was obvious that debt was becoming poison), I think most of the blame for AFG's current predicament lies at the feet of a group of hedge funds (with the unwitting help of stupid, gullible journalists in the FIN) that have colluded and shorted AFG to death over the last two months.

It was this aggressive short selling that triggered the API margin call, which in turn destroyed AFG's reputation, which in turn caused GTI's cornerstone investor to pull out, which in turn caused AFG's bankers to demand the current solvency test, which in turn forced the company to suspend itself from the ASX, which in turn has destroyed AFG's management's ability to negotiate from a position of any kind of strength (or even fairness), which in turn has attracted 'vultures' such as Macquarie, GE etc intent on carving up AFG's high quality assets for a song. You get the picture.

If AFG is in fact insolvent (in the manner of ENRON), then clearly management have flagrantly breached their continuous disclosure obligations over the last few months, and they deserve the inevitable class-actions and criminal trials coming their way. But I don't think this is the case.

AFG's board is not afraid to sign off on the (fully audited) half year results (as some have claimed). Rather, my guess is that the board has chosen not to release the half year results until the banks have also independently signed off on AFG's solvency and the company has found a way to retire its short term debt.

But none of this needed to happen.

Assuming AFG has not been breaching its continuous disclosure obligations over the last few months (i.e., assuming we can believe its ASX releases), we can assume that AFG is solidly profitable and has around $300mill in cash/undrawn debt facilities. Furthermore, it only has $250mill worth of debt maturing in the short term.

If the short selling over the last two months had been more tightly monitored and advertised by ASIC and the ASX (as it should have been), and if the FIN had not published silly articles (fed by an organisied 'whisper campaign' from short selling hedge funds), then AFG would likely still be trading north of $6 right now, having bounced (like BNB did yesterday) on the back of its solid half year results.

And if the stock was now trading at a reasonable (even if cheap) level, AFG would be in a position right now to conduct an orderly $250mill rights issue or attract a new investor (to the tune of $250mill). This way, AFG could keep its dividend, the May debt could be retired completely, gearing levels lowered, and the company could continue business as usual (or near usual) over FY08 and FY09 (by which time the debt crisis will likely have run its course). The rest of AFG's senior debt does not mature until Sept 2009. Alternatively, if the Com Bank could simply give AFG more time, the company might only need to suspend its dividend this year and provide a manageable amount of its existing cash to pay off the $250mill in its entirety (keep in mind that until very recently most analysts felt AFG was on track to post a full year NPAT in the region of $270mill this year).

While AFG's business model obviously needs a significant overhaul in light of the new market environment, it would nevertheless be a major, shameful tragedy for the ASX if a company like AFG was brought down by hedge funds' whisper campaign and only $250mill worth of short term debt. In the context of the high quality and significant net tangible value of AFG's assets, its excellent leasing business, its reasonable cash position, and its profitability (and expected profit growth), $250mill is a disgustingly small amount of debt to warrant the destruction of the company.

Shame on the hedge funds involved, shame on the FIN, and shame on the ASX/ASIC for not monitoring the behavior of the said hedge funds.