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 MARKET REPORTS |
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Analyst report - shares
"Stock of the week": ABC Learning
September 10, 2007
Tim Morris, wise-owl.com analyst
Stock: ABC Learning
Code: ABS
Market cap: $3.232bn
When a CEO spends over $22 million buying stock in his own company on the open market, it is fair to assume that he is confident in its outlook. Eddie Groves, CEO of ABC Learning, the world’s largest listed childcare provider, has certainly been putting his money where his mouth is as the company’s share price has floundered in light of concerns about its future direction.
After becoming the dominant player in the domestic market, ABC Learning has pursued an aggressive overseas expansion. The high levels of debt and dilutive capital raisings that have been required to fund its international ambitions have not pleased investors, and doubts about the company’s ability to repeat its local achievements in the US market have weighed on the share price.
However, following the company’s latest result, which was its 9th consecutive year of earnings growth, everything appears to be on track, with revenues up 115% to $1.69bn and net profit up 76% to $143.1m. Fuelling this result was a 78% increase in centres under management to 2,238, which follows a trend where by that figure has roughly doubled each year since 2001.
An increased presence usually equates to increased revenues and profits, however the expansion has not come cheap, and high debt levels and dilutive capital raisings have hampered shareholder returns. Return on equity is now a mere 7.8%, and earnings per share growth, although strong at 29%, significantly lagged profit growth. Also worrying the market is the company’s interest obligations. Total debt to equity stands at over 90%, and, after rising 3-fold in the last 12 months, interest costs look set to rise again this year.
However, ABC Learning’s operational cash flows are strong enough to withstand a more than doubling of interest payments, and we are confident that the earnings growth from recent acquisitions will outweigh such costs. As the company’s debt profile becomes more certain, capital raisings are less necessary, and earnings maintain their rapid pace of growth, we expect the market to warm to the stock.
With the stock trading on its lowest PE since 2003, we feel that it is a great time to buy in, and gain exposure to a market leader in a growth industry supported by social trends and rising government funding.
Wise-owl.com has a buy recommendation on ABC Learning.
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Tim Morris is an analyst at Wise-owl.com, one of Australia's leading independent stockmarket research houses.
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
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