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Sunday, December 24, 2006

Auston @ 20 cts ( Education / Singapore ) 0 comments

Final Poll Results: 9:4

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Poor core business fundamentals

2. Ridiculous valuation

3. Insiders selling out

Auston is a regional private education provider which has been embroiled in a scandal that drew in CAD investigations in 2004-05 due to profit overstatement. It has recently sought to reposition itself in online gaming through a new acquisition.

The stock was thinly-traded at 4-5 cents over the last two years, but has recently inexplicably shot up to as high as 22 cents on high volume, which is drawing new market interest in the stock. It looks totally unsupportable.

First a look at its core business and growth potential. Its corporate problems has badly impacted the student recruitment as well as dealings with business partners (some education partnerships lost) over the past two years, with directors, both independent and executive, coming in and out in a flurry. It has been forced to recapitalise at unfavourable share prices (compared to its IPO price of 28 cents) reflecting its sorry state of affairs. Although the restructuring has probably pulled it out of desperate straits, the sense is that its education business might have stagnated due to increasing competition and loss of brand equity, to the extent that it is entering a new business, online gaming and e-commerce, through a new acquisition Australia-based M2B Game World. Also, its education business appears to be shifting emphasis overseas, with collaboration with a partner (and substantial shareholder) Hong Bo in Wuhan,China and plans to open a resorts management school in Cambodia. That, to me, is operating from a position of weakness when it has not managed to build up its brand in the local market.

The financials and track record over the past few years corroborate its declining business. Its student enrolment problems are reflected in halving of group revenue every year since 2003, from S$13M in FY03 to S$3M in FY05 (it appears to have stabilised in 1H06). Given its high operating expenses, which may be considered to impart considerable operating leverage effects, the result has been steadily increasing losses. As of 1H07, the company was still making losses. There is a profit guarantee of S$500K from M2B Game World for each of the next two years, though it is probably inadequate to overturn the deficit. Cash-flow wise, Auston has been consistently operating cashflow-negative, which is why it has had to recapitalise consistently to facilitate its restructuring process. A sad state of affairs.

To consider the valuation aspect, first consider the number of times it has gone to market to raise new capital, which is just mind-boggling. From an initial 68M outstanding shares post-IPO in 2003, the number of ordinary shares today is 275M shares, through a series of rights and warrant issues, new share placements, and an acquisition paid for by new shares. And this is excluding 34M warrants which are now deeply in the money (exercise price $0.025) and another 50M new shares which Auston is preparing to issue again. That brings total potential shares to 360M shares. And most of these were issued at really cheap prices of about 5-6 cents (rights and warrants issue even less). If we consider the 2003 IPO price of 28 cents to be fairly valued, that the business can be said to have deteriorated since then (a fair comment given the above observations regarding its business), and that share capital is ballooning to 5 times the original ..... and one has to see the ridiculous valuation of 20 cents for an Auston share now. For information, one Auston share is now backed by just 1 cent of net assets; about 50% of its total assets comprises intangible goodwill on acquisition of M2B Games World.

So one asks: why would the market value Auston at 20 cents per share, and on huge recent volume some more? Seriously, nobody really knows. Perhaps it is some fundamental developments which have altered the company's outlook completely, for example its tie-up with Hong Bo, a supposed major education provider in China, or its online game venture which might be very lucrative. But if so, the insiders and substantial shareholders certainly don't know it. M2B World, which held 26% of Auston by virtue of the new shares issued for its M2B Games World business, halved its stake to 13% through market sales in December. Former chairman Li Zongyang, also recently, sold his warrants at 6.5-7.5 cents, as well as all his shares, and resigned as chairman; at 20 cents mother share price surely the intrinsic value of these warrants would be more given that their exercise price is just 2.5 cents? Reverse takeover by a third party? Anything is possible of course. What's more probable, though, is creation of market liquidity and price jack-up by a certain market entity in order to create exit opportunities for the 240M equity instruments issued over the past two years, and/or to justify the placement of 50M new shares at the placement price. We have all seen the case of Hengxin recently; it is clear to all that it was a pre-placement price jackup to facilitate the upcoming cashcall, only to be thwarted by certain dissenting board directors.

Those who call for a buy on the basis of the recent price surge on huge volume are putting the cart before the horse. I do believe that market prices can reflect certain fundamental news that are not yet made public. However, existing business fundamentals and track record should corroborate the price surge if one is inclined to take price signals as clues to implied fundamentals. Otherwise, he will just be shooting in the dark. No sympathy for him if he shoots himself.

Poll(please vote)
I agree that Auston is a hot-stock-not: Yes/No




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