MELBOURNE AUSTRALIA (Daily Reckoning): Oh for the influence of a heavyweight market commentator. Perhaps one day we can pen, er, type something and then sit back and see the market follow our word as a company’s share price soars or plummets. Perhaps that is a little egotistical, so we shall stick to what we normally do – watch from the sidelines.
But there are some that do have more influence than others… perhaps. Following a ‘corporate presentation’ on Wednesday, we noticed that one of yesterday’s biggest movers on the ASX was Oncard International Ltd. (ASX: ONC), rising by 76% from 21 cents to close at 37 cents.
Not only was there the corporate presentation but there was also a recommendation of sorts in Alan Kohler’s Eureka Report under the headline, “Investment aces back Oncard.”
The ‘investment aces’ we are told are Peter Scanlon (ex Patrick), Dick Pratt and James Packer. It wouldn’t be too cruel to suggest that the jury is still out on Packer even though he has so far managed to avoid destroying Publish & Broadcasting Ltd (ASX: PBL). However, the memory of One.Tel is surely still fresh in many investors minds… even though apparently it isn’t fresh in Packer’s due to his bad memory.
First, what did the company have to say for itself in the corporate presentation? Well, maybe even before that we should fill in the gaps of who or what Oncard International is.
According to the blurb on the company’s website, Oncard is a “leading card marketing, issuing and management company.” Happy so far? Ok, a bit more, it says “Oncard creates and issues its own and co-branded card products that can incorporate loyalty, reward and payment solutions.”
If we are being honest, we are still none the wiser. But our interest has been pricked so we are prepared to look further. And after a further look we think we get it. It isn’t too dissimilar to a gift voucher card that you might get from Myer, or your Qantas frequent flyer card.
The gist of the business appears to be that money is credited to the card which can then be used by the card holder to redeem rewards. In the meantime, Oncard is able to earn interest on those funds until they are used by the cardholder.
Not a bad little earner we have to agree. Of course, the robustness of the system relies heavily on the solvency of Oncard. If the venture goes to the wall then the deposits made to the cards are likely to become worthless as Oncard would not be able to honour their obligations.
Is that likely? Who knows, and we would hope it is not likely. However, so far the company is doing a pretty good impersonation of a Cash Burner. Last year the company reported a loss of over $600,000. It’s cash position for last year would have been dire if it wasn’t for the $5 million issue of new shares.
And guess what the company is planning to do this year? Easy, let’s take a look at the corporate presentation which tells us that Oncard is “Looking to undertake a A$5-A$10 million capital raising in March 2007.”
Nothing wrong with a capital raising providing the company that is raising the capital is able to indicate a clear purpose for the cash proceeds. Do Oncard provide this for shareholders? Not really. The company says it intends to use the proceeds to “fund additional growth in new card programmes and possibly a number of JV initiatives, and to broaden the shareholder base.”
Long on rhetoric, short on specifics. Our other concern with this as an investment is the company’s reliance on China. Don’t get us wrong, we are still big China fans – in the right industry. We are not convinced this is it, but we could be mistaken.
The biggest issue we see with putting all their eggs into the China basket is that it is likely to get smashed if Chinese companies are able to replicate the business model quickly and use it to produce their own cards and their own service. The beauty of the resources sector is that iron ore or copper or uranium cannot be easily copied and manufactured. They are a raw material.
Could Oncard face the same problem that car manufacturers and computer makers had with China where their product was reverse engineered allowing Chinese companies the opportunity to sell their product for a much cheaper cost. General Motors and Cisco were two global companies that have struggled against this problem.
What chance does a small Australian company valued at only $28 million have if GM and Cisco were not able to succeed.
for The Daily Reckoning Australia