1. Earnings Quality
Consider the following sentences taken from the most recent annual report:
"The acquisition of SGS was structured as an acquisition of the various entities rather than an acquisition of the common stock of Quindell Plc"
"Directors are unable to identify or rationalise every historic transaction undertaken by the former directors of the various entities and have made fair value adjustments as appropriate"
What effect might this have on reported profit and loss?
Firstly, restating assets at 'provisional fair value' leads to a gain from bargain purchase.
SGH managed to receive assets at a massive discount to cash consideration five times!
The end result was 58.9m booked as income.
Others might think that 58.9m might not be significant as it only constitutes 10% of revenue. However PBT for the entire year came in at only 114.5m.
Removing the gains on acquisition will practically half profit before tax.
2. Cash Flow
Over a long period of time you can expect cash flow to mirror changes in revenue or NPAT.
Yet out of these five years SGH has only managed to record one year of positive free cash flow!
3. Retail is trapped
Too many people attempted to catch the falling knife!
The high number of overly emotional posts demonstrates how retailers are unlikely to cut losses early and only sell once the pain becomes too much.
I think true capitulation is still to come.
4. Quantitative Measures
These provide an entirely objective view of a firms solvency and accounting treatment.
M-Score of -0.84 implies that the firm is a manipulator
Z-Score of 0.96 implies that the firm is distressed
5. Valuation
Since there is no cash generation it does not make any sense to use a discounted cash flow model.
Using EPS is also inappropriate given the large amount of debt on the books.
Taking multiples at face value we are left with the following:
EV/OCF = 33.8x
EV/EBITDA = 10.4x
EV/REV = 2.68x
Hardly 'cheap' even in todays market.
SGH did give a normalised EBITDA figure however it did not include all necessary adjustments. After removing the effect of once offs I calculated normalised EBITDA of 89.2 million. This would place SGH on a fy15 EV/EBITDA multiple of 15.4x
6. Bonuses
