Boom child care operator, ABC Learning Centres hit a small pothole yesterday in its endless quest to grow.
After revealing a solid profit increase for the first half of the year, the company then said that it had been approached by a third party about a potential joint transaction involving its 17.9 per cent stake in toy company Funtastic Ltd.
That jolted the market and sent the shares lower. They closed 31c down at $7.62 after closing at $7.93 last Friday.
The result was out before the market opened and the shares opened 11c weaker at $7.82, despite directors reaffirming guidance for the full year, fell and then bounced.
But the shares weakened noticeably after the Funtastic news was released just after midday and the stock was on the slide most of the afternoon
ABC’s near 18 per cent of Funtastic was obtained through the deal last November to sell Funtastic the Judius group of companies in a deal worth $44 million. That gave ABC $5 million and cash and the 17.99 per cent stake in FUN.
ABC says Judius is a leading wholesaler and distributor of toys, learning and educational products to the childcare industry and to specialty retailers. The products cover the complete spectrum of children’s development, including literacy, maths, motor skills, arts & crafts and music.
The news of the tie up with ABC came the same day as Funtastic also revealed a sharp downturn in earnings from a “tough” retail environment.
First half earnings were estimated to be up to 30 per cent plus lower at the EBITDA and after tax level.
The shares had been falling slowly for several months until the ABC tie-up was revealed. From then on they started rising, slowly and by last Friday had risen 50c from $1.26 to $1.76 when they copped a ‘please explain’ from the ASX.
That produced the news of an ‘approach’ from a third party type of statement that blind Freddie could have written after the price gain.
“The company has received a confidential, preliminary, incomplete and currently unfunded proposal from a third party in relation to a possible transaction which, if implemented, may result in a change of control of the company,” it said.
Funtastic said it had only begun to consider the proposal and had had preliminary talks with the party. “There is no guarantee that these discussions will lead to any agreement being reached with the third partly,” it added.
Funtastic shares rose to a new all time high of $1.94 (the previous was $1.90 midway through last year) because investors could see the chances of exiting the toy group which has fallen on hard times, thanks to a slump in sales and profits.
The timing of the announcements yesterday was intriguing: Funtastic made its announcement at 9.54 am, before the market opened and ABC waited until 12.30 pm to make its short statement, after its earnings were released.
“ABC has been approached by a third party in relation to a joint transaction which, if implemented would result in a change in control of Funtastic,” the statement from ABC said.
“However, at this point in time ABC’s deliberations are preliminary only, and its board has made no decision to take any action.”
ABC said it has not made any formal approach to Funtastic.
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ABC had earlier reaffirmed its earnings per share guidance after reporting a 62 per cent jump in interim net profit to $62 million for the six months to December.
It said it will meet guidance through its continued growth in Australia and New Zealand with stronger earnings from its US and UK operation.
ABC’s guidance for EPS to grow to 36 cents for the full year and its earnings before interest, tax depreciation and amortisation (EBITDA) will be over $273 million. EPS in the 2006 year was 27c and EBITDA was $157 million.
ABC directors said this improvement “will be achieved with continued growth in Australia and New Zealand earnings, stronger earnings from the US operations reflecting second half seasonality and acquisitions, and a six month contribution from UK operations.”
The first half results were on a 123 per cent lift in total revenue to $491.1 million which reflected the last year’s rapid expansion and acquisitions of Kids Campus, Hutchison’s Child Care Services and the Children’s Courtyard.
ABC now operates 1,465 centres providing care daily in its four markets of Australia, New Zealand, the US and the UK.
EBITDA for the period increased 92 per cent to $134.4 million over the previous corresponding period and looks on track to meet the guidance figure.
ABC said the overall performance was heightened by the sale of Judius on December 29, which is possibly what may have spooked some investors early on.
ABC declared a fully franked interim dividend of eights cents per share, compared to seven cents in the first half of 2006.
ABC said it will acquire and develop 200 centres per year in Australia as well as ramping up its acquisitions in New Zealand. Centre margins rose slightly in the half to 13.3 per cent from 12.1 per cent and the US centres doubled earnings.
So some positives but the Funtastic play has created concerns.
