Wednesday, February 27, 2008

ABC Learning (ABS) Price Crash - Is It A Buying Opportunity?

ABC Learning (ASX Code ABS) shares plummeted yesterday. ABC Learning shares - listed on the Australian stock market - reached an intra-day low of $1.15 before closing the day at $2.14. Shares are now in a trading halt. The current price is a far cry from the peak of over $8.50 reached early last year.

ABC Learning's drop in share price was apparently triggered by a lower profit result and investor concerns over high debt levels. To be honest, I haven't followed this company terribly closely over the last couple years as I thought it was way too expensive. But the market appears to have been concerned that the company's lending covenants contained provisions related to shire price or market capitalization. The company has since released a statement that this is not the case and that it's not in breach of it's lending covenants.

I just heard on ABC News that 1 director of ABC Learning sold shares just before the share price plunged. And 19 million shares were sold yesterday by CEO Eddie Groves and his wife. From what I understand, a large portion of the stock owned by Groves was exposed to margin loans and that's what triggered his selling. That was after Groves had told the Australian Financial Review that he would be safe from any margin calls. On top of that, it seems that while Groves was telling the market that the fundamentals of the company remained strong, his lenders were dumping his shares to meet margin calls. While nobody knows for sure there was a margin call, at would seem to be the case given the large number of shares the Groves' sold.

Insider trading laws will be put to the test with one director selling shares just before the share price drop. From what I understand, the sale was due to a margin call. But the director would not normally have been allowed to trade shares immediately before the profit was announced. While I don't know the insider trading laws very well, this does seem to be an anomaly.

And just to complicate things further, as part of the request for a trading halt this morning ABC Learning also indicated that there was a potential buyer for parts of it's business. What does this mean? Is the company under pressure due to its high debt levels - so much so that it may need to sell off part of the business to pay down it's debt levels.

I haven't been able to confirm it, but everyone is saying that this was triggered by the sub-prime mortgage melt down in the US. I presume that as ABC Learning has refinanced its debt, it's had to pay more as lending have become a lot more cautious about risk.

While I haven't been through the figures yet, I think anecdotal evidence suggests that I should be staying away from the company for now. But I will certainly have a closer look at recent ABC Learning financial statements because these situations of doom and gloom can sometimes provide great stock market investing opportunities.

I Have since written more about ABC Learning.


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