ASG Group - Cash Cloud?

Was reading the IT section of the Financial Review the other day and noticed there was an article showcasing the ASG Group. This is an IT services business that is investing heavily in "Cloud computing", which is the new thing in delivering IT services to the masses.

A few things stood out in the article, especially the statement from the CEO that investors don't understand the IT industry in Australia. This was in response to the ASG Share price reducing from $0.85 to $0.76 in a day in response to the latest financial report (share price it is now at $0.66....22% drop in a week). The danger is that I think they understand it very well.

How having worked in the IT biz for a while, especially in Australia, it concerns me that ASG Group believe they are the leader in "cloud". I would say that Fujitsu is very much the leader in Australia who have also recently opened up a new data centre in Perth and is aggressively looking for customers to fill it. ASG, being based in Perth, is on the receiving end of some "Japanese whale" competition which is going to put a downer on future profits.
I think this shows up in last year results as well. Without a 5 million "Deferred Consideration Adjustment" (i.e a reduction in the deferred cost of acquisition) that added to the profit, the earnings per share would have halved in 2012 (which is probably the real reason why the share price has tanked a bit)

Also, having looked at the latest Finance figures, it appears that ASG Group are in desperate need of financing. They have employed an overdraft (at 9%) and pretty much all their cash (they have $12,000 in the bank now) instead of using conventional debt funding to fund their investment into cloud which scares me a bit. Can they get conventional debt? Their debt to equity ratio is pretty good so I wouldn't have thought it wouldn't be a problem to get some, and would definitely help them grow their profits. Using up cash (when it is king) seems odd. Equity is out unless they are prepared to take a hit to the share price (and at a cost of equity of 14%) is expensive. Would be looking for some clarification on why cash was used for funding before throwing too much money at this company.

And there is more outgoings to come.They need to find at least $24 million this year to pay off their acquisition payment and current liability debt. So if they aren't tapping the debt or equity markets in the future, I would be extremely surprised.

So, has this company been oversold on the market? I would say no. That said, possibilities of growth are there. It just all depends on how patriotic our companies and government departments are. Do they care if Fujitsu, IBM, HP and CSC (who are the major IT managed service companies in Australia) are foreign owned? If they do, ASG Group could be ahead of the pack.

Note: This is not a recommendation to invest/not invest in ASG Group. If you are thinking of investing, please see your financial advisor.