re: heads up (or down) - alphacenturion Looks like AlphaC has...

re: heads up (or down) - alphacenturion Looks like AlphaC has been moonlighting as a journo for the fin

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Maybe accountants should go figure
Feb 11

The evidence is mounting that public companies that are run by accountants perform poorly for shareholders.

The short and ghastly careers of Harts and Stockford are two items of evidence. We now have a third in the performance of the various public entities run by Ross Norgard and Trevor Clohessy.

Norgard Clohessy made its name as a top insolvency firm in Perth. That was all jolly good, but around the turn of the century the lads decided to spread their wings and go public. That probably seemed like a great idea at the time, but any investor who plunged into all their stocks would probably be needing a bit of insolvency advice himself by now.

One of their companies is Xanadu Wines (mentioned in this column a fortnight ago), whose share price has plunged from 40¢ in 2002 to 4¢ now.

Another of their companies is Ausron Ltd (formerly the Yates garden business), whose shares stood at 60¢ in 2000 but are now 5¢.

Olea Australis Ltd, in which Trevor is the only investor, is an olive-growing business whose shares have slid from 22¢ in early 2002 to 2.4¢ now.

Finally, Ross is in QPSX, which specialises in commercialising intellectual property. Its shares have gone from 70¢ in 2002 to 15.5¢ at present.

Ross and Trevor would appear to have taken at least part of the pain in Xanadu. They appear to have been among the directors who took a placement in February 2003 at 31¢. They also held vineyard lots, which they swapped for shares at 29¢ when Xanadu took over the vineyard scheme.

Ross has told Pierpont that he has participated in every rights issue Xanadu has made, which means his average price must be a lot higher than the current market. In a rights issue last year, Ross bought a further 14million shares at 9¢ and theyÕve since halved in value.

Olea came dangerously close to being a good company.

The prospectus, issued in March 2000, invited punters to buy olive groves at Dandaragan, 150 kilometres north of Perth.

This float was marketed by Norgard Clohessy Equity. Ross didnÕt take a stake, but Trevor did.

Subscribers paid $10,247 for an olive grove covering one-fifth of a hectare, all of which was tax deductible. A punter investing in a grove also bought 5000 shares in Olea (which would manage the groves) at 20¢ each. So growers had a stake in the company to which they paid management fees.

The prospectus was only a middling success. Olea wanted to sell between 280 and 1500 groves but sold only 917. The real problem was that sales amounted to just under 200 hectares of olives and anyone in the olive business really needs north of 400 hectares if theyÕre going to be a price maker instead of a price taker.

Olea needed to get scale, so in April 2001 it launched Olea Australis Stage II to sell a further 190 hectares and raise more than $1million for the company. By that time, tax schemes had been depth-charged by the Australian Taxation Office, so investors understandably stayed away from Olea II in droves. Olea II sold only 41 hectares and raised a mere $255,000.

Olea was left stranded. It didnÕt have scale and it didnÕt have enough cash. Olive trees take about three years to bear fruit and in the meantime they cost money watering and pruning. Olea forecast a net profit of $2.2 million for 2001, but instead made a $473,000 loss.

The losses mounted in subsequent years, as did the cash burn. By June last year, Olea was down to its last $50,000. The company raised $1.85million after a rights issue at 2.5¢, in which sub-underwriters and professionals shouldered much of the burden.
Judging by substantial shareholder notices, Trevor must have picked up 13 million of them.

Olea is the only listed olive farmer in Australia. If it had deep pockets, it could have bought out many of the little farms around Australia and got real scale. Instead, its most likely future is to struggle along without being really big enough.

Ausron looks a lot less like a good idea. Ausron was originally the Yates garden business, which was taken over by Norgard Clohessy Equity in March 2001. Clients of UBS subscribed $35million at 44¢ a share to fund the takeover.

They might as well have spent the money buying Pierpont lunch. Over the next few years, Ross and Trevor sold off all the Yates businesses, incurring some horrible write-downs in the process. Some $49million was written off the value of YatesÕs businesses in 2002 and 2003.

Having blown up Yates, Ausron is today left with a few timber interests. In PierpontÕs experience, timber costs a lot when itÕs being planted and very little in maintenance afterwards, but takes decades to mature and be sold.
So itÕs not a good cash flow business for the first quarter of a century: indeed, itÕs somewhat negative.
For the past couple of years, Ausron has been burning cash at the rate of $6 million a year and had only $2.8 million left in the bank last June. Notes to the 2004 financials showed Ausron had future operating lease commitments totalling $10 million, which were not provided for in the accounts. Ausron had also guaranteed expenditure commitments of a subsidiary for $5.6million. The market capitalisation of Ausron now is only half the $35million that the punters subscribed back in 2001.

Finally we have QPSX, whose main business is fighting a court case over technology that breaks voice messages down into little packets and then reassembles them at the other end, so that when Pierpont rings his broker and asks him to buy BHP, the broker can (a) understand the message and
(b) buy the right stock.

Mind you, given the sort of brokers Pierpont deals with, itÕs still a smart precaution to deal with them before lunch, because come the afternoon Pierpont doubts whether they would understand the message if the little packets came wrapped with silk bows on them.

Anyhow, this technology is supposed to be frightfully valuable in the future, when all our phone calls will be made over the internet.

The only small problem is that QPSX reckons Deutsche Telekom and Siemens have pinched the technology and so is suing the European giants. When a German court found for the home side back in July, the QPSX share price dropped faster than Mark LathamÕs poll ratings, halving from 41¢ in a week. QPSX is appealing against the decision, but the shares are still only 16¢ and unlikely to rise much further until it wins a case. Costs in the case were $2.7million, of which $2.2 million was borne by a facility with Lloyds. QPSX has litigation funding in place (which will limit its return from the case) but ran perilously low on cash.

Last June the company had only $740,000 in the till. After the cold shock of the September verdict, Ross and another director tipped in $500,000 each to keep QPSX in working capital.

DirectorsÕ loans and convertible notes totalling $5 million have now been raised to keep QPSX solvent. Ross has taken $750,000 in convertible notes, plus another $2million to himself or his nominees. These bear interest at 9.5per cent and are convertible into shares at a 20 per cent discount to market at any price down to 3¢ a share (which gives us a fair idea of where the directors think the price might go). Ross already, incidentally, holds nearly one-third of QPSXÕs issued capital.

Ross reckons 50 per cent of the cases in Germany that go to appeal result in the lower court verdict being reversed. ThatÕs a comforting statistic, but so far the sharemarket scoreboard of Trevor and Ross is 0-4, which Pierpont finds a lot less encouraging. Anyhow, the track record of these companies is one more reason to beware of bean counters.