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Abano shareholders seek halt to spending spree

Abano shareholders seek halt to spending spree

· Further capital raising required soon
· Material errors and omissions in the Grant Samuel Report
· Urgent need for improved financial reporting

Two significant Abano Healthcare Group (Abano) shareholders have called for a halt to the company’s debt fuelled dental acquisition strategy, following the second profit downgrade in eight months.

Healthcare Industry Limited (HIL) and Steamboat Capital Limited together control 20% of Abano and remain deeply concerned with corporate governance, the deteriorating performance of the company and the lack of quality information available to shareholders.

Investor James Reeves of Steamboat Capital said that the Grant Samuel report released at the Abano AGM is fundamentally flawed and is not independent.

Further call for cash likely

“The Grant Samuel report fails to properly take into account where the cash will come from to pay for future acquisitions.

“Reviewing the balance sheet, we believe shareholders are likely to be asked to put their hand in their pocket yet again in the next few months to fund an acquisition strategy which is not accretive on a per share basis due to poor execution,” Mr Reeves said.

Abano will have spent approximately $100m on dental acquisitions in the four years between FY11 and FY14, but the results, excluding Audiology, show zero increase in profits available to shareholders.

“Where have all the acquired profits gone? It’s a simple question and one that we call on the board to address.

“We see a pattern – unrealistic promises of exceptional returns at some distant point in the future, while using ever increasing leverage. The company has continued to pay dividends while having to raise capital to sustain those dividends. This is not a real business model and is unsustainable.

“Abano has become a highly leveraged, low margin business with significant exposure to short-term public contracts. The loss of any material contract would readily put the dividend at risk,” Mr Reeves said.

Flawed methodology in Grant Samuel report

HIL’s Peter Hutson said the Grant Samuel report contained a large number of errors, omissions and contradictions and drew attention to four major flaws in the methodology:

· Failing to allow for another capital raising to pay for acquisitions to be made in second half FY14.
· Incorrectly applying ‘historical earnings’ based acquisition multiples to future Abano earnings. (An error that contradicts statements contained in Abano’s own AGM documents).
· Valuing Pathology – a one contract business with 20 months to run – on the same multiple as Radiology.
· Valuing Abano based on future acquisitions that have not yet taken place. (An error that also contradicts Abano’s own presentation).

“Having reviewed the report in detail, there is no logic to the methodology adopted. Allowing for the latest profit downgrade, a figure of $6.00-$7.00 a share is appropriate. This is more in line with Abano advisor, Forsyth Barr’s own sum of the parts (SOTP) valuation of $7.88 per share, as noted in its report issued on 13 November prior to the AGM and the most recent profit downgrade.

“The report also raises a broader issue in terms of the reliability and accuracy of information available to the market,” Mr Hutson said.

Shareholders call for improved financial reporting

Mr Hutson advised that HIL and Steamboat were not willing to accept returns of one per cent per annum and would now seek changes to governance, strategy, executional capability and more relevant financial reporting.

“At one per cent return, investors are better off putting their money in the bank.

“Abano is a highly leveraged entity and in the face of the recent profit downgrades, immediate improvements need to be made to its financial reporting practices so that performance can be accurately measured,” Mr Hutson said.

Mr Reeves and Mr Hutson also called for greater transparency in management presentations including:

· More emphasis on reporting at an EBIT level – EBIT pays the bank’s interest bill (not EBITDA).
· Reporting year-on-year dental performance metrics – That exclude the effect of acquisitions. (Same store sales and performance).
· More informative cash flow reporting – That shows underlying cash generated from operations.
· Making full disclosure of Abano’s balance sheet – Including debt levels / leverage and financial ratios indicating its ability to service future debt and sustain dividends.

“HIL and Steamboat Capital seek an end to vague, conflicting messaging and the promise of a future pay day. We also remain concerned that information provided to the board is not being disclosed to all shareholders in a timely manner. We expect the Abano board to address these concerns and clarify its plans,” Mr Hutson said.

HIL and Steamboat Capital are now actively seeking the views of fellow shareholders on a broad range of issues in order to bring about much needed organisational and commercial changes that will lead to a sustainable improvement in operating performance and resulting shareholder value.

“Good governance and performance are two sides of the same coin,” said Mr Reeves.


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