Us Move Bites Into Profits

Sydney Morning Herald

Tuesday February 26, 2008

Vanda Carson

CHILD care provider ABC Learning Centre's ambitious $1 billion expansion into the US market has come back to haunt the company, with its profit in the first half slumping more than 40 per cent below that of a year ago.

In a result released after the market closed yesterday, the company blamed the "seasonality" of US earnings for the profit fall, but the bottom line also took a hit from higher than expected one-off charges of $63 million.

Net profit for the six months to December 31, 2007 fell 42 per cent to $37.1 million. The result returns the company's profit to levels last seen in 2006.

This time last year the US centres were credited for a 62 per cent rise in profit.

But since then the number of US centres owned by the company has increased from 357 to 1000, mostly due to the purchase of 600 in January 2007 as part of the La Petite child-care centre business.

Investors have been cautious about ABC's expansion in the US, where it expects most of its future growth, with shares losing nearly half their value since hitting $7.57 last May when Singaporean fund Temasek bought a stake.

The one-off charges included depreciation, borrowing costs associated with the refinancing of the company's $1.4 billion loan facility, expenses associated with the establishment of a staff share plan and the falling value of the company's stake in ailing toy seller Funtastic.

The company's interest bill has also risen, relying on debts to expand nationally as well as break into the US market, where it entered in late 2005 with the $US160 million ($173 million) acquisition of Learning Care Group.

Interest payments and borrowing costs in the first half tripled from $18 million this time last year to $73.2 million in the first half of the current fiscal year.

ABC Learning chief executive Eddy Groves has declined to reveal the interest rate paid by the company on the $1.4 billion facility, only that it was "similar" to what it had previously paid.

In November the company blamed the rise in the Australian dollar against US and European currencies for cutting its earnings guidance by $6 million, as US and European operations account for about half of revenues.

The company said yesterday a quarter of its earnings from its US child-care centres would come in the first half, with the remainder coming in the second half.

Citi analyst Jenny Owen warned this week that the US child-care division could be hit by rising unemployment and mortgage foreclosures.

© 2008 Sydney Morning Herald

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