Street Talk ::

Author: Edited by Anthony Hughes (ahughes@afr.com.au) with Stephen Wisenthal
Date: 03/04/2006
Words: 1830
Source: AFR
Publication: The Financial Review
Section: Market Wrap
Page: 20

Learning the ABC of rapid growth and return on equity

ABC Learning Centres boss Eddy Groves has been attracting his fair share of knockers since it became clear ABC is by far the dominant company in the politically sensitive arena of child care. But Groves is not just getting a hard time from opponents of the corporatisation of child care.

Some observers are also taking issue with the company's ability to handle its astonishing growth.

Clime Asset Management boss and Warren Buffett acolyte Roger Montgomery argues ABC is showing the same strains that eventually brought another fast-growing Queensland company, Flight Centre, back down to earth.

In the latest note to his investors, Montgomery argues that the decline of Flight Centre shares from almost $29 in 2002 to $9.06 in February came as its return on equity fell from 64 per cent in 1998 to 49 per cent in 2002. ROE is forecast at 24 per cent this year.

ABC's shares have surged more than 20-fold since it floated five years ago, and its profits have jumped from $3.3 million in 2001 to a forecast $88 million this year. But its Achilles heel has been its raising of almost $1 billion from shareholders over the same period.

Montgomery reckons ABC shares, which rose 3? on Friday to $8.33, are worth less than $3 and the return on equity would have to double to 21.5 per cent to justify the current price.

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