Alex. I've said before Quindell is irrelevant. The value in PSD is future cash flows from the business, represented in goodwill. How Quindell managed its accounting in the past, aggressive booking of WIP then winding it all back to create loss has no bearing at all. That WIP handed to SGS represents work at various stages without any revenue booked. Of course SGS has inherited receivables and payables that is self self explanatory.
Worst case scenario and there isn't the value initially thought in the inherited cases, read as some cases not having sufficient evidence to follow through, is not critical. It just puts a temporary pressure on timing of cash flows.
As an analogy, you don't buy a gold mine for the gold ore stockpiled ready to crush and process. The mine is purchased for its potential in resources and reserves.
The real issue is goodwill. That represent the future value Slater see in the SGS business. I would agree if that is impaired by a great amount then it is in trouble. Depending on the amount it might suggest they cannot foresee enough future cash flows to service debt and run the operation. If that was to be the case then I can't see how a CR could get up. It would be throwing money at a business model, which they cannot show with confidence, is adequate cash generating ability. If it can't show over a 5 year period an adequate NPV to derive goodwill close to what it is now (adjusted for any rerated to WIP) then there is nothing to suggest that thought can be improved. If they have a plan to improve revenues then that will be factored into the calcualtion of goodwill and therefore lessen a potential impairment.
I won't be spending a moment wasting time looking through Quindells accounts. It is pointless at this time. If goodwill confirms confidence in future cash flows and it is verified by PCW and McGrathNicol and E&Y then that is good enough for me to determine that SGS is profitable. If it isn't then CR is not the answer - break up of the business is on the cards I would think.
SGH Price at posting:
69.0¢ Sentiment: Buy Disclosure: Held
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