asic must query price slump

Watchdogs must query Clough's price slump.
Bryan Frith.
From: The Australian October 29, 2010 12:00AM Increase

THE ASX should take a look at the WA-based Clough group to determine whether the company has satisfied its disclosure obligations.
ASIC, in its new-found regulatory role, should also take a look at the trading activity in the stock over recent weeks.

Clough held its annual meeting in Perth on Tuesday, which got under way at noon, Western Standard Time (3pm AEDT).

At 3.03pm AEDT, Iress posted the chairman's address and at 3.13pm it posted a 56-page presentation by the managing director, John Smith.

The chairman, Mike Harding, was generally bullish. He referred to the third consecutive year for Clough that had been "highly profitable", said the company had a strong balance sheet and cash position to grow the company, and that it had a good order book and had forged several strategic alliances.

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He also announced that he was stepping down as chairman and would move up from deputy chairman to chairman of the larger rival Downer EDI.

The presentation was more interesting. Tucked away on slide 45 was the 2010-11 outlook, which contained a number of bullet points, the last two which read "H1 earnings anticipated to be below H2 2009-10" and "H2 improvement to give anticipated full-year earnings 20-25 per cent down on 2009-10".

Over the past five months Clough's share price had traded in a range of 75c to 86c. The share price closed on Monday at 81c.

By the time of the AGM on Tuesday the share price was down to 78c, but there had been little trading. Activity picked up around 3.45pm AEDT, which would probably coincide with the presentation, and by the close of trading the share price had dropped to 72.5c, with 440,000 shares traded on the day.

The AAP wire service noticed the price fall and attributed it to the news that Harding was departing after four years as chairman, but it seems more probable that some sharp-eyed investors had spotted the steep profit downgrade. There has been no media reporting of the downgrade.

Of course, nowadays in the brave new electronic world it would be possible to attend the AGM with an iPad and trade via an online broker immediately upon learning of the profit downgrade, although this commentator has no way of knowing whether that happened.

On Wednesday, trading activity picked up. The share price opened at 62c -12.5c, or 17 per cent, below the previous day's close - and fell to 59.5c before rallying slightly to close at 64c. Almost 4.5 million shares were traded. Yesterday, the share price rose slightly to 65.5c.

That's still 15.5c, or 19 per cent, below Monday's close, and at the low of 59.5c it was 26 per cent below. Yet there has been no query from the ASX in relation to the price slump.

The ASX requires companies to make disclosure immediately after they become aware that their earnings are expected to differ by more than 10 per cent to 15 per cent from the same previous period.

An earnings downgrade of the magnitude of 20 to 25 per cent is materially price sensitive information which is likely to affect the price or value of a company's securities and requires immediate disclosure.

It's hard to accept that requirement is satisfied by the inclusion of two bullet points deep within a slide presentation.

Arguably Clough should have obtained a trading halt on Tuesday, then specifically drawn investors' attention to the earnings downgrade, and preferably given an explanation.

Clough has not been queried by the ASX in relation to the sudden slump in the share price. Does that indicate that the ASX is aware of the profit downgrade in the slide presentation and considers that it satisfies the company's continuous disclosure requirement? Or is it that the ASX simply missed both the earnings downgrade and the subsequent share price collapse?

On October 7, Clough began the on-market buyback of up to 1 million shares, which was being undertaken to "satisfy the demand for shares as a result of options being exercised in the company's long-term incentive plan".

Between 3 million and 4 million options appear to have been converted to shares in recent months at prices well below the prevailing sharemarket price. Were some of those shares sold into the buyback?

Last Thursday, a total of 213,109 shares were purchased at 79.5c and 80c a share.

That raises the question as to exactly when Clough became aware that the earnings for the full year were likely to fall by 20 per cent to 25 per cent.

Was the company aware by last Thursday and, if so, should it have been buying at 80c a share? Certainly investors noting the buyback would be entitled to take it as sign of confidence and an indication that nothing was amiss.

Adding grist to the mill, Clough was back in the market for its shares on Wednesday, after the ever-so-quiet earnings downgrade, and picked up 603.225 shares filling the buyback, at prices between 61c and 65.5c. a share.

Investors who bought Clough shares in ignorance of the earnings downgrade have been disadvantaged and arguably should have grounds for compensation. That's something for ASIC to consider.

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