Playtime’s over for ABC’s Eddy Groves

ABC Learning Centres boss Eddy Groves must have sensed trouble ahead when he turned up to last November’s annual general meeting in a suit.

Groves usually favours cowboy boots, black t-shirts and a blonde mullet, so reporters were surprised by his sober new look. Groves later admitted it was the first time he’d ever worn a suit to the AGM.

Perhaps the suit was Groves’s way of distancing himself from the highly entrepreneurial image he has cultivated since listing ABC in March 2001. That persona served Groves well as he built ABC from a 43-centre, $25 million minnow into a $3.5 billion international childcare giant with a steady stream of acquisitions.

But since the credit crisis shook markets in the middle of last year, investors have been dumping anything remotely entrepreneurial and ABC’s stock has fallen from $7.25 at the end of June 2007 to just $3.74 today.

Eddy Groves could never be accused of not doing everything for his company. He has tried to support the share price by topping up his personal shareholding on seven separate occasions in the last year, spending $14.6 million in the process. But his paper losses have continued to mount. Last June, the combined stakes of Eddy and his wife Le Neve were valued at $251.2 million. Today their shares are worth just $140.6 million. Groves now appears certain to be kicked of BRW’s Rich 200 for the first time since he joined the list in 2002.

Today’s results for the December half will do nothing to ease investor concerns. Net profit fell 42% to $37.1 million as a result of a three-fold increase in interest costs, up from $18 million to $73.2 million.

ABC also argues that the rapid expansion of its US operations (the number of centres it has there has increased from 357 to 1000 in the last six months) have introduced a new seasonality into its results, as earnings from the US are skewed to the second half. But earnings from its mature Australian business fell by more than 10%.

ABC has re-affirmed its guidance of earnings-per-share growth of 15% in 2007-08, but that is unlikely to spark a rally in ABC’s share price. Indeed, the stock is likely to remain under severe pressure.

Two weeks ago, rumours began sweeping the market that hedge funds had started short selling ABC Learning, with seven million shares (three times the normal market volume) changing hands on 12 February. There was speculation part of a stake owned by Eddy and his wife Le Neve was leveraged, with the margin calls starting around the $3.50-to-$4-a-share mark. The pair hasn’t been forced to dump their stock yet, but this speculation will not help the share price in the short term.

The company’s longer-term outlook is cloudy. While the big picture demographics – particularly rising birth rates and falling unemployment rates in Australia and the US – are on Eddy’s side, there are many uncertainties.

In the current climate, investors will rightly remain nervous about the company’s high debt, although at least ABC’s $1 billion capital raising (including the sale of a 12% stake to Singaporean investment fund Temasek Holdings) means its seemingly unending string of capital raisings will stop for at least 12 months.

Groves says the expansion into the US and Britain is meeting targets and there are clearly big opportunities for further growth in these markets. But exactly how expensive this expansion will be and exactly when the rewards will flow through to shareholders is not clear. In this flighty market, investors will demand more proof that ABC’s global expansion is working before they jump back into the stock.

Since ABC listed in 2001, Groves has asked investors to put their trust in his vision for the childcare sector. But the market is running low on faith and it will take more than a nice suit for Groves to win investors back.

This article first appeared in Business Spectator