Roller-coaster ride ends in disAdvantage

BY BRIAN GAYNOR

Advantage Group shareholders have learned that 12 months is a long time in business.

Since last year's annual meeting, the share price has gone from $2.30 to $5.65 to $1.22 last Wednesday. At last year's meeting, held at Auckland's trendy LeftField on Princes Wharf, the atmosphere was extremely positive.

Eric Watson and his glamorous wife made fashionably late entrances, while chairman Evan Christian and chief executive Greg Cross pumped out bullish forecasts.

The directors had been seduced by the Nasdaq technology boom, but now that bubble has burst, Advantage's share price has plunged like those of most other internet-related companies.

This year's meeting - held yesterday at the more conservative Carlton Hotel - was downbeat and sombre, and there was no sign of Mr and Mrs Watson.

Mr Christian and Mr Cross continued to make extremely optimistic comments, but investors were relatively unimpressed, and Advantage's shares closed at $1.32, down 22c for the week.

The company's roller-coaster ride began at the 1999 annual meeting on November 19. Mr Christian opened the proceedings by claiming that Advantage was the most exciting growth company on the New Zealand Stock Exchange.

He also announced that he, Mr Watson and Nick Gordon had consolidated their 22.7 million Advantage shares into ePac, an international internet company, which was looking to list on the Nasdaq and to lift its investment in Advantage.

Mr Cross told shareholders that the internet had massive potential and used Priceline.com, a United States-based company that finds cheap deals for consumers, as an excellent example of the net's potential. This was unfortunate as Priceline.com's share price is now $2.50, compared with $72 at the time and a peak of $104 in April.

After the meeting, Advantage's share price took off. In just four weeks it surged from $2.30 to $4.15 on big volume. New investors rushed in, and over the past 12 months the number of shareholders has risen from 1700 to 4780.

Analysts wrote bullish reports, and the company took advantage of the strong sharemarket to issue new shares to institutional investors.

A great deal of publicity was generated over the placement of 1.5 million shares, at $3.45 a share, to a fund controlled by George Soros, the well-known US fund manager.

Advantage also went on an aggressive acquisition spree. The annual report for the June 2000 year revealed that it acquired $55.7 million of net assets, of which $48.5 million was goodwill.

These purchases were funded by the issue of $11.1 million of new shares, cash payments of $37 million and $7.6 million in the form of either cash or shares.

These acquisitions have had a negative impact on Advantage's cash position because the cash cost exceeded the money raised through share placements by $8.1 million.

Staff numbers have accelerated from 60 to 500, and the total amount paid to employees in the second half of the latest year was $14 million, compared with just $1.9 million for the same period in 1998-99.

The sharp downturn in technology and internet stocks in the United States has had a big impact on Advantage. It has highlighted issues that have made investors extremely nervous. These are:

The company bought most of its new assets at or near the peak of the Nasdaq boom. This indicates that it may have paid too much, although insiders argue that the acquisitions were not expensive.

The annual report revealed that 2.5 million shares issued in consideration for KCS Pty are underwritten by Advantage at $2.88 a share. In other words, Advantage will have to make a cash payment or issue more shares to vendors if its share price is below $2.88 a share 12 months after the acquisition date.

Software development costs of $4.6 million were capitalised during the latest year. If these had been charged to income, the company would have reported a loss of $1.6 million instead of a profit of $3 million.

At June 30, goodwill and capitalised software development costs were $53.2 million, compared with group shareholder funds of $64 million.

The highly flaunted FlyingPig internet site was sold last month. Advantage has not disclosed the amount of writeoffs associated with the sale.

Staff morale may have diminished because 3.2 million options issued in recent months have an exercise price of $1.97 a share and are now out of the money.

In October, Anthony Howard resigned from the board and there are now only three directors, Mr Christian, Mr Gordon and Mr Cross. The board is short on experience and independent directors, although the chairman told yesterday's meeting that this was being addressed.

One of the most fascinating features of Advantage's roller-coaster ride has been the role of its aggressive public relations policy and the reaction of sharebroker analysts.

The company has published a huge amount of public relations material, most of it optimistic and short on detail.

This barrage of PR material seduced analysts, and less than four months ago, when the company's share price was in the $3 range, most of them were still producing exceptionally bullish reports. They made strong buy recommendations and were predicting that Advantage's share price would exceed $4 before August 2001.

In August, Bruce McKay, of DF Mainland Securities, who this week accused Advantage shareholders of not being able to use their calculators, was predicting a 12-month share price target of $5.52.

Advantage's share price fell sharply this week when ePac, now called Qixel, announced it was in voluntary liquidation and its Advantage shares had been returned to the original owners Mr Christian, Mr Watson and Mr Gordon.

It was official confirmation that ePac would not list on the Nasdaq and the announcement also gave the false impression that Mr Watson was reducing his Advantage holding.

But the company's problems go deeper than that. Mr Cross reported a surplus before tax and goodwill of $3.81 million for the quarter ended September 30 but indicated that the outlook for the second quarter was not strong.

The first-quarter result included a profit of $2 million from the sale of CommSoft shares, but the next quarter will include writeoffs on FlyingPig and SupplyNet. These losses are expected to exceed $4 million.

Mr Cross warned that total revenue for the year would be in the $90 million to $100 million range instead of the forecast $110 million. He also said that customers were more cautious and "the dotcom meltdown has had a significant impact on our business."

Although Advantage has some good businesses, it was carried away by the internet boom, and employee numbers in its e-Services division have ballooned from three to 320 since October 1999.

This division is important to the company's future performance - if it can produce strong profit growth the outlook is very positive, if not, Advantage's future will be less than spectacular.

Investors are sceptical. When Mr Christian told yesterday's meeting, "I think Advantage stock is ridiculously undervalued by the market," one seasoned shareholder turned and chuckled, "That's what Bob Jones used to say."

* Disclosure of interest: Brian Gaynor is an Advantage shareholder.