ABC Learning (ABS) Share Trading Recommendation

ABC Learning (ABS) have had their USA operations in Dallas, Texas toured by stockmarket analysts Macquarie Research Equities (MRE). The importance of the USA business for ABS's future growth can't be underestimated given February's result where the company disappointed on this front. The analyst has commented that there is "significant USA potential, but plenty of work to be done". ABS has over 1,000 USA centres (1.5% USA market share) at present with the top quartile centres averaging US$220,000 EBITDA. ABC's pitch to investors is that it has the ability to lift the USA portfolio towards top quartile performance and generate >US$200m compared to the analyst's USA FY08e forecast of US$80m (AUD$106m). To achieve this, ABC needs to materially improve occupancy from the low 60% level towards 80%, cut USA head office costs in half from the current US$70m and reduce rental costs from 18% of revenues to 14% through the rollout of a USA childcare real estate trust. The execution of this strategy is likely to take years, rather than months, and the analysts remain uncertain whether the occupancy gains are achievable in a very competitive sector. USA performance to date has missed market expectations. ABC's 1H07 USA EBITDA of AUD$7.8m was below market expectations of >$15m and highlighted a seasonality skew to the second half. Second half USA guidance of >$30m EBITDA needs to be met to maintain confidence in the USA growth strategy. ABS is confident that the March quarter has proceeded to plan, although it remains early days for the US$330m La Petite acquisition which settled on January 26. Increase in financial risk needs to be considered. The increase in ABC's debt level towards $1.3bn post the La Petite acquisition and the fall in the fixed charges cover towards 1.9x has increased the financial risk with ABS. The analysts estimate that ABC Learning (ABS) has around $300m in acquisition funding left unless a hybrid note issue is pursued successfully. Despite the increased financial risk, the market valuation of ABC is largely unchanged, with ABC priced at 19.6x FY08e EPS, a 24% premium to the average Australian industrial stock.

ABC Learning Limited is listed on the Australian Stock Exchange (ASX) under stock code ABS. You can view their investor website here. ABS was listed on the ASX on 21 March, 2001. Sallyanne Atkinson is the Chairman for ABC Learning and Edmund Groves as well as Dr Le Neve Groves, Mr Martin Kemp are the CEO's of ABS. The company provides formal child care services and education around the world. Browse for Australian stockbroker recommendations. Check your charts and good luck with your share trading!