Under the Radar: Mothercare in need of some nurturing14.10.2011

Here is my Under the Radar column with Fairfax Business Day. On the one hand it shows a company in real trouble, while on the other, a company flush with funds. Comments always appreciated.

Mothercare in need of some nurturing

Richard Hemming
October 14, 2011 - 9:01AM


For any small company it is a bad sign when the CFO suddenly leaves, but it’s doubly bad when this occurs after four months in the job - which is what happened on Tuesday when Mothercare Australia announced that CFO and company secretary Robert de Lorenzo had resigned “with effect of close of business today”.

This is a company which operates the Mothercare, Kids Central and Early Learning Centre retail brands and stores in Australia.

But if only this was the end of the story for Mothercare Australia (ASX code MLC). In the past 12 months its shares have fallen 65 per cent. At 14 cents, it has a market cap of $36 million.

Earlier this month, the company announced a convertible note issue to raise $7.7 million paying 11.45 per cent a year of unfranked dividends. The note will be taken up principally by major shareholders: the Myer Family and Mothercare UK.

There is no doubt that these funds are needed by MLC. The question is, are they enough?

In the year to 30 June, the company reported operating cash flow of minus-$16.5 million (the prior year it was minus-$4 million) which translated to a loss of $21.2 million, compared with a loss of $4.1 million in fiscal 2010.

At the balance date it had debt of $4.5 million, due to be paid within 12 months. Of this, $3.5 million was owed to Mothercare UK. This means that much of the $7.7 million will be used to refinance debt.

This begs the question, how will the company sustain a loss-making business?

Compounding its problems is that Mothercare UK announced on Tuesday that its chief Ben Gordon was leaving “by mutual consent”. Media reports make it clear that with the UK economy faltering, Gordon’s drive for offshore expansion has been a disaster.

MLC shareholders can reasonably assume that there will not be much more love from Mothercare UK for its Australian namesake.

The decision to invest through convertible notes by shareholders shows that there is considerable nervousness about MLC’s prospects.

After all, they receive a hefty interest rate and it is unlikely that the convertible notes will be converted into equity, since MLC’s share price must exceed 35 cents for this to happen.

Plus, convertible note holders usually rank in front of ordinary shares in the event of MLC winding up.

Adding to the shareholder nerves must be the decision by Clime Investment Management (ASX code CIW) to complete an “in specie” distribution of its 5.4 per cent stake in MLC, announced earlier this month. This means Clime will distribute its holding to its 523 shareholders.

In an email, Clime’s chief investment officer, John Abernethy said that CIW had received shareholder approval in May, and had not distributed its shareholding prior to June “due to tax advice”. He added that he had “no knowledge of the reason” for the CFO’s resignation.

Under the Radar has tried (in vain) to contact MLC’s managing director Brent Dennison.

As seems to have happened to Mothercare UK, Mothercare Australia is a story of too much too fast. Growth is fine, but the company never generated the operating cash flow to pay for it, and now major stakeholders are reaching for parachutes.

Decmil in position for its Olympic moment

On a more inspiring note, Decmil (ASX code DCG), announced on Tuesday that it has been awarded a contract worth in the order of $70 million to build a camp for Chevron’s $29 billion “Wheatstone” liquid natural gas (LNG) project in Western Australia’s Pilbara coast.

The company builds mining camps or “villages” as some call them. At $2.17 a share, it has a market cap of $271 million and trades on a forecast price/earnings ratio of about 10 times, which is about 10 per cent cheaper than the market average.

Last year Decmil’s revenues were close to $400 million and broker Hartleys forecasts that they will grow to $490 million in fiscal 2012.

Decmil has zero debt and about $50 million in cash. At its current capacity, one analyst estimates that it could handle over $600 million of revenue.

A fear for investors is that the work dries up once the construction is complete. But aside from building villages, it also does concreting and other non-process related infrastructure.

The company is certainly well positioned if BHP Billiton presses the ‘‘start’’ button for its $30 billion expansion of the Olympic Dam copper, gold and uranium mine in South Australia next year. The peak work force for this project is estimated to be 25,000.

For mining services companies, the problems of the likes of Mothercare and retailers in general are about as remote as the locations they operate in.

As one executive in the sector said to me: “If we didn’t read the financial press, we wouldn’t know there were any problems”.

Read more: http://www.smh.com.au/business/markets/mothercare-in-need-of-some-nurturing-20111013-1lna0.html#ixzz1aiIeowjh

About the Author

Caroline Mark

Caroline is the publisher of Under the Radar Report. She has a diverse background, from producing financial publications, to fundraising and marketing.

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