Keep INVESTING Simple and Safe (KISS)
****Investment Philosophy, Strategy and various Valuation Methods****
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
Primary Health Care owns the nation's second-largest pathology business and a growing collection of medical centres. These should be good businesses, enjoying the twin tailwinds of an ageing population and growing healthcare expenditure.
Yet Primary, when we first analysed it in detail in early May last year, failed to pass muster on two important points. First, it had an uncomfortably high debt level - $1.5bn, in fact. Second, our analysis revealed several aggressive accounting treatments; nothing illegal, just things that could have been couched more conservatively.
But another more alarming red flag was about to surface.
In early May the company undertook a large share placement of $315 million. Another occurred in September, infusing an additional $180 million of much-needed cash into the company. Both raisings helped reduce Primary's debt, which was fine as far as it went.
Until I read the second page of September's two-page announcement, that is. It revealed that Primary's founder and managing director, Dr Edmund Bateman, “intends to sell down approximately 11.6 million shares ... in conjunction with the placement.”
Bateman took more than $70 million off the table (the final placement price was $6.08 per share) - about 30% of his stake in the company. The timing proved fortuitous.
On 16 February, less than six months after the share sale at $6.08, Primary reported a half-year profit that fell well short of investor expectations. Primary's share price is now languishing close to $4.
There's nothing necessarily wrong with sales such as Bateman's. Occasionally we get lucky, at other times less so. As with John Gay at Gunns, Bateman may have had his own reasons for cutting his stake. Given subsequent events, though, shareholders could be forgiven for feeling apprehensive about his behaviour.
At the November annual meeting, Bateman revealed some disturbing news from the September quarter (bear in mind his share sale was announced on 15 September, towards the end of that period).
“Reduction in the rate of GP bulk billing throughout Australia has already started to occur with a >1% reduction in the September 2009 quarter (the greatest fall in 6 years)”, the announcement said.
Could Bateman have known about this at the time of the share sale? And if not, why not? Bateman is managing director after all.
November a key month
It then eventuated that, following Primary's introduction of co-payments, revenue in its key pathology business fell sharply in November.
This was the month of the annual meeting and about six weeks after Bateman's share sale.
Primary's 6,750 shareholders didn't find this out until February 16 when the official results were released. Cast in this light, shareholders could be forgiven for thinking twice about the timing of Bateman's September share sale.
There are two immediate questions. Firstly, when did Bateman find out that Primary's profit performance was declining markedly? And secondly, if it wasn't until just before shareholders were told mid-last month, three months after the business started to suffer, why did it take so long?
If this isn't a regulatory issue, then surely it must be a managerial one. Either way, it appears that Primary shareholders have an issue to grapple with.
This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investorwhich provides independent advice to sharemarket investors.