Accountants Dilemma, page-28

On 15/1/16, I changed my sentiment from SELL to HOLD, stating the following (refer Post #:
16806276):
….
“As for sentiment, I've shifted mine to hold because I believe that they will (and sentiment is now supporting this, even on HC) that they will heavily cut into OPEX and likely move to reduce headcount by 10-15%. But once again, no CR. The dividends however will be suspended for H16 and F16, as the primary concession to capital management. That's my take on it, this Friday evening having previously been there, done that, shifted to a new operating paradigm (all whilst transforming /transitioning to a new operating space).”

My sentiment remains at HOLD due to what I believe can be done from an OPEX, headcount, efficiency and productivity /streamlining perspective. If though SGH genuinely lacks the moral fortitude to do this (ie: $100M OPEX reduction; 10-15% headcount reduction, all to be done with C16), then my sentiment would return to SELL.

I changed at the time because I felt that, for the first time, both the 17/12 and 7/1 announcements reflected that SGH had finally realised the seriousness of their dilemma and were now enamoured to doing something about it. I’m still leaning that way given the overnight Gazette comments whilst ignoring today’s ASX comments. However, if the Gazette comments are all fluff and no stuff, then sentiment will also again return to SELL.

Houghton in my view gets it. Others though I’m not so sure about (especially executive management). I also doubt that the Chairman gets it. If ever there was a time for the Chairman to lead both the Board and the Company by example, it is now. This is when the next 80 years can be forged, not lost. So, I’m still expecting wholesale management and Board renewal. But again, if not, then I doubt that SGH will do much more than continue staggering about.

So, absent the numbers being updated, my FP view remains at $2.40, largely supported by the AU operations (60%) rather than with anything much to do with either the UK (20%) or SGS (20%) operations meaning that AU can still secure profits and outcomes, but cannot support the existing debt burden. So by conducting radical surgery on the UK and SGS operations whilst clearly pruning the AU functions, I can see AU providing the foundation base for eventual recovery. But not so if the scalpel is not taken to the UK or to SGS.

As for execution risk, due to today’s statement, I consider that that risk is now at /above 80% which means that my view on the SP is 48c. To change this to a lower execution risk rating (improved positioning), SGH needs to demonstrate that they are clearly cutting into OPEX, headcount, etc. provided that they can demonstrate that they’re intent on freeing up $100M in OPEX (hence, improved operating cash flow by this amount or more), then execution risk should drop back towards 50-60%, in which case pricing would shift towards 96c - $1.20. But that’s my view, based on my approach towards how I look at assessing value vs risk.

To get it to anything less than 50% however, they will need to show that they’ve aiming to implement the OPEX, headcount and other reductions by mid-year. If they do this, then the risk drops to closer 30-40%, in which case, towards $1.44 - $1.68. But to then shift it any further than this will take stabilising /improving margins (not necessarily revenue) which in turn would then feed into future value generation.

Considered in another way, ring in the changes, make the cuts and drive some of your future profits through the cost side rather than through the revenue side of the equation. Then execution risk dissipates and /or the fundamentals actually change.

Now, as for other matters, some posters (like Oggy) and I have butted heads a few times, so each to their own, but I thought that in closing some stats might also be of interest. Since 10/1, Oggy has posted 162x, for a net 137x on SGH whilst I’ve posted 92x for a net 69x on SGH.

The day by day blows have been (through to 6.00pm today):

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7	Column 8	Column 9
0	Date	Oggy0907			Grant62			Variance	Variance
1		Total	Other	Net SGH	Total	Other	Net SGH	O2G	Run O2G
2	28/1	15	1	14	11	3	8	5	68
3	27/1	19	5	14	4	4	-	14	63
4	26/1	-	-	-	2	-	2	(2)	49
5	25/1	12	4	8	3	-	3	5	51
6	24/1	1	-	1	-	-	-	1	46
7	23/1	5	-	5	1	-	1	4	45
8	22/1	12	5	7	5	-	5	2	41
9	21/9	9	-	9	5	5	-	9	39
10	20/1	21	2	19	15	4	11	8	30
11	19/1	4	2	2	5	1	4	(2)	22
12	18/1	6	1	5	8	1	7	(2)	24
13	17/1	3	-	3	2	-	2	1	26
14	16/1	8	-	8	4	-	4	4	25
15	15/1	12	1	11	3	-	3	8	21
16	14/1	17	1	16	14	6	8	8	13
17	13/1	2	-	2	6	-	6	(4)	5
18	12/1	4	1	3	5	1	4	(1)	9
19	11/1	11	2	9	1	1	-	9	10
20	10/1	2	-	2	1	-	1	1	1
21	Total	162	25	137	95	26	69	68	68

So, GLTAH and to all those with an interest in SGH, the profession or concerning those working there. Everyone on this site has a valuable contribution to make, whether as a holder, a seller, an interested observer, a former holder, a contrarian, a shorter, a downsider, an upramper, a hobbyist or whoever. So regardless of views held or sentiments expressed, everyone is and should be welcomed. Now, as for hobbies, let me guess?

No-one therefore wishes the worst for anyone or in any circumstance, but some things do need to be done (very much sooner now rather than later) if indeed there is to be another 80 years (let alone another 12 months). A strong surviving SGH benefits the legal profession. A crippled SGH however will quickly project its failings onto all who operate or function within the profession. It’s not just SGH’s reputation that is on display here. It is the profession’s. So, right now is about as close as they have come so far to repeating the near extinction events of the mid 1980s and during the lead up to Ok Tedi. This time, they will survive but not before taking the axe to OPEX, headcount, marginal matters, poorly functioning areas of law, and the like. Tomorrow’s SGH will therefore be dramatically changed from today’s version and when that happens I’ll be back there as a long term (not trading) shareholder. But until then, they’ve got some very real work ahead of them. So, it’s time to get busy as another month of opportunity has now all but passed them by.