I think everyone has noticed the incredible share price performance of ASC this year. Intrigued by this I decided to run my slide rule over the forward figures and try and work out where all the excitement has been coming from. My conclusion is this: Whilst ASC obviously are doing well as a company and theoretically have a promising future ahead of them, the plain and simple fact is the share price has got way ahead of itself.
To illustrate this point best, I will take the best-case scenario for ASC, performance wise and use these numbers to demonstrate exactly how absurd the current valuation is.
Seymour Pierce the house broker (therefore rather biased broker!) estimate that FY pre-tax profits for YE March 2006 could be as high as £2.0m. Well let’s increase that by another 50% to £3m, just to keep the raging bulls quiet (thats nearly a ten-fold increase in two years.....). Lets also complete ignore tax, amortisation, writing down of good will, exceptional charges, beefing up of infrastructure etc etc and relate this £3m profit directly into EPS. With 67.9m shares in issue it would be 4.4p.
Now what about PER? Well following such a period of dramatic growth we would have to scale this back a bit. After all, a company cannot keep on doubling its profits every year. At some point it will start to reach a critical mass and growth will slow down to a more sedately rate. So lets use a PER of 20 for ASC in 2006 to reflect this. That gives a share price of 20 x 4.4p of 88p.
With the share price already so high (mid 60’s) that means virtually no rise in share price between now and June 2006 (when the FY March 2006 results will be published and therefore fact).
Now did you ever see a chart which travelled virtually horizontally for nearly two years? No – neither did I. So you can be pretty sure that what is going to happen somewhere between now and then is that the share price is going to fall, catch up with realistic value and then rise again. In fact it may do this many times over the next 21 months/ 2 years.
Now in my figures I have taken pretty much the most raging bull outlook i.e. there is no downside, no negatives, no failure etc. In reality there are some barriers to profit for ASC along the way. One large barrier is the cost of beefing up their infrastructure. For ASC to realise the kind of sales growth they are hoping for, they will have to build a new distribution warehouse. This they have already talked about and it will be costly. Also, they will have to bear the brunt of high advertising costs in order to draw more attention and therefore more business to their website. I understand they are already spending a fortune on this.
Seymour Pierce will have made some guesstimates about these kinds of costs, and so maybe we should look at their figure of £2m PTP for FY 2006 more seriously and not get carried away. From this they have anticipated a basic EPS (i.e. adjusted for tax, amortisation etc) of 1.8p. Ok – I can hear the bulls wailing again – so lets round this up to 2.0p to keep them happy. Now lets apply our PER of 20 and what do we get. A share price of 40p. Ok – I hear wailing again, so let's use a PER of 30 and imagine this year upon year growth is endless. That still only gives a share price of 60p.
However you look at it, the inescapable fact is that is the share price has reflected this performance, before ASC has even delivered the goods. In other words, the market is valuing ASC on best case scenario figures for FY March 2006 a full 21 months before it will find out if ASC has made it. Madness. Complete and utter madness.
So my advice would have to be – SHORT this stock – because it’s going down. And I think the rot will set in after the AGM – especially if ASC does what I think they might do, which is talk to shareholders about building a new warehouse and prepare them for some exceptional costs. I am opening a rather large short today for this reason. At any rate I think I will be in profit soon even if the directors don’t mention the warehouse. The reason being is there is really nothing more they can say to add to the bull frenzy which will increase the share price. It’s already sky high. It’ll just be ‘jam tomorrow’ talk and investors will just have to wait and see (and hope) the jam arrives. At these prices it’s going to be a long wait!
Additional bear factors since the above post was wriiten:
1. AGM Statement Announces that registered users have only increased by 8% (up from 339,600 to 369,000)
2. Simon Cawkwell has posted on the thread and seems bearish. He and his followers could be about to open a massive short.
**********LATEST BEAR NEWS 14th September 2004**********
Simon Cawkwell aka Evil Knievil opens a massive short on ASC and advises others to follow in the www.t1ps.com website.
Now that the Cavalry has arrived I will be personally gearing up for a whopping short tomorrow. Come and join me my friends in a shorting bonanza!!
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