06/12/2005 - 21:00

Tim Treadgold: Briefcase - Local prices sinking in a small pool

06/12/2005 - 21:00

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Tim Treadgold: Briefcase - Local prices sinking in a small pool

Buying local is a good thing when shopping for fruit and vegetables, but not necessarily a wise investment policy. Rather than going up with the broader Australian market over the past year or so, it seems that a large number of Western Australian companies have been going down.

pSivida, iiNet, Deep Yellow, Clinical Cell Culture, Evans & Tate, and even the latest market darling, Cazaly Resources, fall into the category of being promoted beyond their level of competence, and found wanting.

Briefcase is open to suggestions, but believes the common thread linking the stocks is Perth’s small, but very active community of speculators. A function of this small-pool syndrome (SPS for short) is that stocks quickly become flavours of the day, without anyone looking too deeply into the underlying business case.

Evans & Tate is a classic, and quite well-known example. The company has won lots of awards for its wine, some of which are truly excellent. It has also invested heavily in marketing the brand, bought distressed wine stocks from other, troubled, wineries, and promoted itself as a future leader of the industry.

Shame about the fact that profit failed to flow as readily as the plonk, with the result that E&T has slumped spectacularly, with the shares falling from around $1.20 in mid 2004 to recent trades around 26 cents, a stunning 78 per cent fall in value. Ouch.

Less well known is the trouble dogging iiNet, another much-loved local that has plunged, from a high earlier this year of $3.85 to recent trades around $1.85. Try as it might, Briefcase has uncovered remarkably little in the way of local commentary on that 52 per cent price plunge, or the fact that the stock has dropped from $3.40 as recently as September 5, producing 45.5 per cent fall over 60 trading days. Another ‘ouch’ for the locals, but apparently linked to heavy-duty east coast criticism on troubles for iiNet in merging the OzEmail network into its system, and supported by a sell tip from the broking firm, BBY.

pSivida, which Briefcase had a nibble at in mid-October, has continued to travel roughly. Since noting a fall in the price of the biotechnology hopeful from 94c to 77c, pSivida has drifted down as low as 55 cents on November 28, copped a ‘going slow’ ticket in the form of a stock exchange query, and been forced to issue an explanatory memo on why all is well. Perhaps better times are ahead for pSivida, though management doesn’t help itself by attacking every critic who dares point out that the company’s share price over the past year looks absolutely awful, falling from $1.41 last December to recent trades at 64 cents, a slump of 54 per cent.

Clinical Cell Culture, another stock singled out by Briefcase for an apparent lack of a strong business case, but with plenty of emotional support, has done a little better, though its fall from a 12-month high of 44.5 cents to recent trades at 34.5 cents represents a 22 per cent decline. The stock also now faces the problem of developing as a European-based spray-on skin developer without its founder, Professor Fiona Wood, who has disembarked to focus on her research.

Deep Yellow also falls into the category of being promoted beyond reasonable levels of support. This uranium hopeful acquired a swag of tenements from the sector leader, Paladin Resources, and watched its share price soar from 1.5 cents to 20 cents, a 1,233 per cent gain for people aboard the rocket. Unfortunately, a fresh round of drilling has failed to find as much uranium as was hoped, with the result that that stock is back down around 7.7 cents. In keeping with the glass-half-full view of the world held by local punters, you can argue that Deep Yellow is still 413 per cent above its low point. Briefcase, being a bit more of a realist, chooses to point out that someone who paid the 20-cents price is now 61.5 per cent poorer.

Cazaly, the final example of optimism outshining reality, continues to trade around $1.30, a rather comfortable 550 per cent above its 12-month low point of 20 cents. Of course, it could also be said that the stock is 45 per cent below its high of last week when furious bidding pushed Cazaly to $2.40. As Briefcase said last week, and State Development Minister Alan Carpenter belatedly pointed out, Cazaly is nothing more than a raffle – and the smart money still says it will lose, or take between 10 and 20 years to win.

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On the matter of local companies which have done well, and since retreated, it is hard to ignore one of the big boys in the pack, West Australian Newspapers Holdings. Since cracking the $9-a-share mark in late 2004, this has been a stock in decline.

Defenders of the dominant Perth print-media player will argue that the peak price came after a heady upward climb that lifted WAN from around $6.30 in May last year, a rise of around 42 per cent in a matter of months.

Briefcase acknowledges last year’s top performance but points out that investing is all about future trends, and on that score the picture is less than encouraging, for a number of reasons.

Firstly, the share price fall on a 12-month basis (December 2 last year to December 2 this year) is $8.75 to $8.11, a slide of 7.3 per cent. That’s not too bad, until measured against the all ordinaries index over the same period, which rose by 14.7 per cent, to produce a more interesting gap of 22 per cent that WAN has with the rest of the market.

Secondly, there is that troubling question of growth. Ever since re-listing, WAN has struggled to find a meaningful growth option, largely because it controls most of the WA print advertising market. An adventurous investment in a half-share in cinema chain has, so far, proved to be a bit of a dud.

Thirdly, there is the departure next year of the highly-regarded chief executive, Ian Law, a man who has performed wonders in stripping costs out of WAN but who struggled like his predecessors to find the magic growth formula.

The worrying point for shareholders is the view that Mr Law has done his best work, can’t cut any more costs, can’t find a way to grow the business, and is now heading for his next cost-cutting mission – at which he will undoubtedly excel.

Meanwhile back at WAN, with costs cut to the bone, it’s a question of what next or, more to the point, does anyone actually know how to grow a business confronting the media demon known as the Internet?

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“What matters is not that I should succeed, but that you should fail.” Attributed to Gore Vidal

 

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