Advanced Share Yeah Yeah
Hat tip to Warnie! Thanks to Peter for pointing out Advanced Share’s profit upgrade.
Great news. Quality, focused board. Owner focused company driven by founder.
Final dividend upped from an anticipated 1.25 to 1.8c after a 75% jump in pretax profit to $2.2M for 2010.
Sales up, increased trading, new clients, cost focus with a verifiable claim of expanding margins. Confident of future growth and profitability.
The announcement has put a rocket under the share price with a gain on large volume, over 200k shares as of 1pm.
ASW’s management and directors never say much, they just do. Is it a good buy now. Well I think you need to make that call for yourself 
I don’t think it’s much of an ask from a valuation perspective to assume ASW average dividend in future years will be higher. This 1.8 dividend comes at what it considered the low half, yet it’s higher than the 1.75c in the first half. Take that 8.3% fully franked yield (3.55/43) and add on growth to match whatever price target you want 20% over four years would see a dividend over 7c, with a shrinking yield the price could triple in that time frame. However, over the same period, both history and our current economic pickles du jour point to a tough time on share markets for at least one year. ASW is in a very cyclical business after all. Fortunately transaction flow keeps the lows brief and not to deep for share registries.
Disclosure: Long ASW.AX
ASW Updates
8 Jul 10 SOL become major holder with 4M shares. ASW looks to national expansion. 2M from founder Kim Chong and 2M placement, both at 50 cents.
Related posts:
A few interesting questions:
1. Why wont the CEO sell another 2m of shares, instead of issuing another 2 m dilutary shares? After all, he has over 20 m of shares….
2. How do we view the investment skills of SOL?
3. How much influence can SOL exert on the boards of its other investments in respect of selection of registry service providers?
So many questions, so little time.
Peter
1. Why should he? So many possible answers I see little benefit in conjecture. I think it was a good deal and the right thing to do as a business owner. It showed he was prepared to sell his own shares at the same price as the dilution, which was the then market price and I believe a fair price. Chong only takes home $250k a year and with 25M shares he was certainly asset rich and cash poor. So a million before tax is probably simply the amount he needs to a) upgrade house b) drink Crystal every night for eight years!
2. I respect what the families in SOL have built. It’s good to get a major holder on the registry.
3. At the very least it should get the name of Advanced Share a wider audience.
Dean
The questions I have posed are actually semi-rhetorical, and one has to figure out possible answers with a probability tree process.
Firstly, some factual matters. Chong takes home way more than $250k per year. The half yearly dividend has already put over $437k (fully franked!!) into his coffers based on 25 m shares. Plus the next dividend will take him close to $900k fully franked. That is over $1m per year gross up, not bad for a days work.
So frankly, I dont really believe it was for the cash alone. Also remember, his CGT profits from the sale are subject to individual marginal tax rates. There goes 500k of taxes to the government for them to waste on further projects for mates.
There are several highly probable reasons for the deal structure. First, Chong does not want to sell that many shares and he does not need to. He prefers to get more capital into the company rather than into his pockets. This is a positive signal for shareholders.
Secondly, SOL did not want to buy that many shares from Chong, but prefers to inject money into the company via an issue. This is a slightly negative to neutral signal for shareholders.
The deal structure is an indication of alignment of interests between management and shareholders. This is in stark contrast to many shares issues I have seen.
Peter, you are of course correct on his cash situation. I also meant refresh my memory on the original float. “The deal structure is an indication of alignment of interests between management and shareholders”. Totally agree, as I said it was a good deal and the right thing to do. As the majority owner, Chong’s interests are aligned with ours and I think this deal further shows that.
Looking at the BS, ASW doesn’t need extra funds to accelerate the national roll-out. Can you think of any other strategic reasons for getting SOL on board? At the end of 2009 ASW had $3.7M of cash, receivables were greater than all liabilities and current business is generating more cash every day. From an owners perspective I’d prefer to see them using the cash rather diluting. Chong is clearly a smart guy, so there has to be another good reason why he went down that root. SOL are only part owners in a half dozen or so companies, so I don;t think getting their companies to use ASW was the reason.
It’s trivial, but are you sure a business owner selling down their position will be taxed at sale price * marginal rate? I’m not sure and that’s why I purposefully stuck to pre-tax figures.
Oh what could the reason be?
PS. Peter. Do you know when I reply to a comment? Do you get an email?
CGT applies to the difference between sale price and acquisition costs. Technically, that should be 10 cents per share, being float price less sale price.
However, from inception to float, there is a gain of 40 cents per share. Somewhere, somehow, one entity or another will be up for the full hog of $1 m gain. A clever accountant may be able to delay the tax liability, but eventually, death and taxes are the same. It comes around eventually, the tricky part is in delaying the event.
I am still figuring out the strategic reason. You are right that ASW doesn’t really need the money. Chong is satisfied that 50 cents is within current market value range, and SOL is satisfied that 50 cents gives them value.
We can brainstorm by email, unless we can an answer from Chong.
p/s I do not get an email notifying me of replies.
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