abc learning recommendation from huntleys, page-2

Business restructuring including asset sales now appears necessary following a poor result leading to a pummelled share price. The sell off was exaggerated by the forced sale of over $50m in shares owned through margin loans by directors including founder Eddie Groves and his wife Le Neve. ABS is a reasonably strong business in Australia but it is paying for an overly ambitious offshore expansion plan and over-geared balance sheet. Investors have been confounded by frequent and dilutive share issues, opaque accounting practices and failure to hit earnings targets particularly in the US. Short-sellers have taken advantage of current market conditions to drive the stock lower. The issue last year of $583m Redeemable Convertible Reset Notes opens the possibility of a change in control and a further heavy dilution to existing shareholders. The notes are convertible to a certain value of shares, not a certain number. As such, the more the share price falls, the greater the number of shares the note holders would be issued. The calculation is the face value of the note divided by a 2.5% discount on the volume-weighted average share price over the prior 20 days. ABS would need to redeem the notes to avoid this scenario, but it would be necessary first to sell assets to raise the necessary funds.

Business Impact: We have been increasingly negative on the stock over the past year but regret not recommending clients sell sooner. Our last report, dated November 29, concluded that conservative investors should stay on the sidelines. We rated the stock as High Business Risk, Medium Price Risk. There is sure to be a series of company announcements in coming days, the outcome of which cannot be determined at this point. Considering the significant uncertainty, not the least the stock being in trading halt, our recommendation is downgraded to Sell/Avoid, until we can assimilate additional information to be announced shortly.

Forecast Impact: --

Recommendation Impact: Reduced from Hold to Sell/Avoid.