Wednesday, June 25, 2008

ABC Learning Shares Plumb New Lows

ABC Learning (ASX Code ABS) is the largest listed childcare provider on the Australian Stock Market. As I wrote in a previous ABC Learning post, it has traded at over $8.00 at its peak about 18 months ago. Since then, it's share price have been on steady (and at times alarming) decline. It reached a new low of 65 cents yesterday.

Earlier this month, a placement of 71.5 million shares at $1.15 to MSPE and Lazard raised $82 million dollars. This represents 15% of the company's issued shares (the most that can be raised without shareholder approval). Since then general market weakness and some poor ABS publicity has left MPSE and Lazard sitting on a reasonable sized paper loss (although ABC Learning shares have recovered a little to close at 73 cents today.

Some of the cash raised along with some of the proceeds of the sale of its US operations are apparently going to be used to pay down debt. Hopefully more reasonable debt levels will reassure investors as to the long term viability of the company.

Surely the underlying business of ABC Learning is strong and profitable. Government childcare subsidies are on the rise again. And ironically, yesterday with its shares plumbing new lows, ABS had announced that it was raising child care fees by 10%. Although such a fee increase generates a lot of negative publicity, it demonstrates the strength of ABC's business.

While I find this to be a very interesting investment opportunity, there are 3 things which hold me back. First off, I find it hard to get a handle on what's happening inside the company. I read the announcements but they don't seem to contain quite enough information for me to be comfortable with the financial position of the company.

Secondly, I suspect the main risk the company faces (apart from its high debt levels) is weakness in the Australian job market. Predicting such things is well beyond my capability but with rising interest rates and declining consumer confidence, the unemployment rate may well continue to rise.

And last, but certainly not least, the Australian Stock Market currently presents a number of other lower risk investment opportunities. The current share price weakness sees many blue chip companies trading at the most reasonable valuations in years. Every time I look at ABC Learning, I can't help thinking about what better opportunities there may be.