Photon fortunes improve but company still faces a debt mountain

Photon Group is showing early signs of trading its way out of trouble, the company’s preliminary report on the financial year suggests.

Shares in the company rose steeply on the ASX this morning – up from 3.9c at close of business last night to 4.6c at the time of posting.

Although EBITDA – earnings before interest, taxation, depreciation and amortisation –  profits were down again, from $65.8m to $49.4m, the company reported that it had cleared some of its debt mountain at a faster rate than expected.  

Photon said: “The company started FY2011 with total cash liabilities of over $450 million. Following the recapitalisation and the subsequent pay-down of debt from operating cash-flows and asset sales, as of June 2011 the company’s total unconditional cash liability is $146 million, comprising $118 million of bank debt under facilities in place until September 2013 and a further $28 million of unconditional cash deferred consideration payments. The deferred consideration payments are due over the next four years, with $15 million of those payments expected to be due in the next six months and the substantial portion of the balance due by first quarter 2012.”

Because there were fewer one-off costs, the outcome for shareholders was better with net profit after tax rising from $20.9m to $30m.

However, the troubled group still faces delicate times with revenue down for the group by 4.8%. Although an improvement, the update appears to suggest that there will still be a significant gap between the $146m to cover debt it will need to find within the next two years and its likely profits during that period.

In today’s market update, Photon CEO Jeremy Philips said:

“Significant progress was made in cleaning up some major issues at Photon in fiscal 2011. The company reduced debt more quickly than originally anticipated, implemented a more streamlined strategy based on a restructured portfolio, and improved the quality of management in key areas.

“These changes are yet to fully flow through to the operating results of all business units, however, we are confident the steps being taken are necessary and are creating a solid foundation for rebuilding the company.”

Photon Group’s key agencies include BMF, BWM and Naked Communications, which the company said was underperforming. The market update will not end speculation that the company needs to sell more of its assets. It said: “The company remains highly pragmatic and continues to actively explore opportunities to create value. However, given there may not be buyers for the company’s non-core businesses at acceptable prices, the working assumption continues to be to focus on operational improvements. The company will not sell assets at discounted prices.”

Today’s AFR speculates that the company’s field marketing business could see a management buyout of $100m-$150m.

In a damning  attack on the credibility of the previous management strategy, the update reveals: “Photon substantially exited from search arbitrage and related businesses through sales and closures. In all, Photon acquired these eclectic operations for $130 million over a number of years. They had no connection with Photon’s other businesses and had minimal value.”

The market update also reveals that the management of BWM had a “put option” on the 49% of the agency they still own which would have allowed them to force Photon to buy the rest of the agency immediately. That will now take place next July, although the founders will still retain an equity stake, Photon said.


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