Although this article is 20 days old it is still a bit scary.I...

Although this article is 20 days old it is still a bit scary.
I have been watching it with interest and there has been buying at the sell price seemingly in larger orders that those selling to buyers. It has a gap to fill which, if it does, would generate a good profit for those game to take the gamble.

Lots of luck


Village Life
Anthony Marx
06jun05
BRISBANE aged-care group Village Life faces a $20million reversal of fortune.

A prospectus forecast of $15.4 million net profit this year has evaporated and one stockbroking firm now predicts a $5 million loss for Australia's biggest for-profit provider of rental retirement units.

Consequently, the business partners who launched the company just seven years ago are locked in the fight of their lives.

Hunkered down in their inner-west office at Milton, joint managing directors John Krimmer and Tony Roberts have their backs to the wall as they work feverishly on a sweeping strategic and operational review of the embattled firm.

Share trading was suspended two weeks today and the unusually long freeze won't be lifted until the pair provide fresh guidance to the market.

A stunning third profit downgrade since February triggered the trading halt on May 23 and a continued bloodletting in the share price, which has crashed from a high of $2.88 in January to just 48.5¢

The company now concedes that net profits will not even amount to $4.5 million and Sentinel Stockbroking has gone so far as to forecast a $5 million loss.

Major stockholders have not been amused, particularly when Village Life management boasted in the middle of last year that 2005 earnings were "in the bag".

Queensland Investment Corporation, which held 7.3 million shares or 6.09 per cent of the company last year, has slowly sold down its entire stake since then. It dumped the last 300,000 shares on May 10, a day after the second profit downgrade sent the price plummeting 46 per cent.

Plenty of other businesses have issued profit warnings recently but Village Life's problems – exemplified by two downgrades just two weeks apart last month – suggest there are bigger structural and management difficulties besetting the firm.

The question analysts are poring over now is whether the company's business model is fundamentally flawed or simply requires a new team at the helm. Regardless, many have downgraded the stock to underperform and recommend to sell.

Ironically, many of these same researchers were originally enchanted with Village Life, which floated in December 2003 at a $1.05 issue price that raised $96.7 million.

They also applauded the float in July last year of the Village Life Trust, a retirement community property trust dominated by $56 million in assets from its parent company.

But one analyst who never shook off doubts about Village Life despite its early successes said the firm suffered from worrisome defects which have only now become gruesomely apparent.

"They are dependent on being able to build for a price and that enables them to be financed. The limiting factor is that residents pay 85 per cent of their pension and 100 per cent of their Commonwealth accommodation allowance. So if they're not built for a price that gives you a return, you can't fund them. And if the amount from residents is insufficient to cover operating costs, then you can't make money managing them," the analyst said.

This analyst maintains the company has adopted a "house of cards" business model, where the collapse of one "card" can bring the whole structure down.

And, sure enough, Village Life blamed higher-than-expected construction costs for the decision last month to scrap a Victorian retirement village project and reconsider another two developments, triggering the third profit downgrade.

The company's growth plans also seemed unrealistic, according to the analyst. With 68 villages and 3418 units dotted around the country, the firm had originally forecast 81 villages and another 21 under construction by June 30, but it's now tipped to reach just 79 – and may be even lower than that, given the spike in building costs.

Adding to the concern was an unease with Mr Krimmer and Mr Roberts as navigators of the ambitious expansion plan.

The analyst never felt comfortable that they had adequate experience and was unhappy that each pocketed a $10.7 million windfall selling down their stake as part of the float rather than ploughing that money back into the enterprise.

Village Life isn't in danger of falling over because, unlike the separate trust, it has no debt. But to really succeed, it needs to marry the strengths of a developer such as Mirvac and a resort operator such as Accor.

And there doesn't seem much hope of that happening despite a potential joint venture initiative to resuscitate the company.

Another analyst who has closely followed the company believes the business model is fine, predicated on a high-volume/low-margin model like that perfected by fast-food trailblazer McDonald's.

The key difficulty is that the company's development pipeline remains up to 12 months behind schedule so profits that should be recorded this year have been deferred to next year.

It's a common problem for small companies that go public and have inadequate management systems to monitor cash flows and adapt to other changes, he said.

ABN Amro Morgans analyst Amanda Miller also thinks the company and its business model retain value even with "management clearly unable to provide accurate information with regards to the likely performance of the group".

But Goldman Sachs JBWere analyst Craig Temby said the company's appalling recent run "points to a lack of systems and controls within the business" and clearly indicates a broken business model.

"As they ramp up the number of villages, the lease payments to the trust are a little bit higher than they are receiving. The main reason is that while they are in a high growth phase, the villages are not up to 90 per cent occupancy and that means they pay for leases in villages that are not fully occupied. Slower growth would alleviate that issue," Mr Temby said.

Former Village Life employees have told The Courier-Mail that a poisonous corporate culture has only exacerbated the company's woes.

They allege that staff who dared to question, criticise or disagree with senior management were pushed aside in favour of "yes men".

A lack of market research led the company to launch four villages in Toowoomba when there was only enough demand for two, one ex-employee said.

To be fair, other aged care providers have also suffered significant setbacks, most notably Prime Life. But, like casinos that lose money, it's hard to fathom how these companies can run off the rails, especially given the well-publicised demographic trends of Australia's ageing baby boomers.

The nation's population of 65-and-above seniors will expand from 2.5 million today to almost 4.5 million by 2023, according to the Australian Bureau of Statistics. Only 3 per cent live in independent accommodation today, meaning there's a huge market ripe for the picking.

But, if Village Life survives in its current form, will their scheme continue to be attractive? One criticism of the financing mechanism is that it leaves very little disposable income left over for residents.

Another area of speculation revolves around a potential takeover by a rival accommodation provider. While possible, the Village Life model is unique and would make a difficult fit with one of its competitors.

Until the company's plans for going forward come into focus, investors have been urged to avoid it like the plague. Sentinel's advice is unambiguous: "Stay away from this stock until the smoke has settled and a clearer view can be ascertained on the direction of the business model."

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