DE should stabilise ship

Hi all,

Have been on holidays with no internet for the last ten days, luckily or unluckily, at least it avoided me the pain to decide whether to sell when SP hit 6.5c. Anyways, based on prior observation, I think the SP will fall further than the high it bounced to, but here are my thoughts why I am holding on (partly because I lost too much as well) after re-reading the financials, and this why I think DE will have good outcomes despite major dilution of current stock holdings.

Background:

Following info was found in the half yearly financials, in note 1.2

"The Directors have formed this view (of going concern) based on a number of factors including:​

· the support that lenders have afforded the Group, in the form of amendments to the SFA, since it was first
established in May 2015;
· the absence of advice from lenders of a withdrawal of their support;
· the nature and scope of recent and ongoing confidential discussions with the lenders and their advisors; and
· that a recapitalisation plan produces a better return to lenders, and other stakeholders, than the alternatives."

The due date for of 26/May/2017 is significant, and I finally got my head around why, because the $400m ish due next year would be classified as current debt out of non-current debt, and given SGH's expected current assets by May 2017 will be less than current debt once including the $400m. If this happens they will be forced to return the loan in 14 days after 26/May/2017, which they cannot do (probably a clause in the covenant, but will be a technical insolvent case I assume). I thought SGH had one more year, but it looks like it's back in the hands of the bankers, very similar situation to Feb 2016.

But given the points in the financials above I still hold hopes that we will get good news out of the coming months, not just about the DE, but I think DE is actually good for share holders, and also for the following points:
1. I had a look at REDDE, very similar situation to SGH, and their SP also fell to something like 6cents, and went back about $1 after a 75% dilution.
2. I had a rough calc on how much the SP would be valued if say 99% dilution occurred this is where I would like some expert opinions to see if it's making any sense, or have I got something wrong. My calculation method is based on:
- First, assuming a % of dilution, and then divide the current shares on issue by the(1- %) to get the number of shares issued after the dilution, so assuming 99% dilution, the shares outstanding after the DE would be 35.2bn given currently 352m shares.
- Then assuming business goes on as BAU, using 2017 1H results as a guide, and assuming 7% margin, say SGH will make $45m profit for the year and on going. This is equivalent to 0.1c per share of profit, with a multiple of 20x, SGH will be worth 2.5c. But using the same calc, if you assume 95% dilution, then the share is worth 12.8c, 75% dilution SGH will be worth 64c per share (main reason is due to the reduction of shares on issue when the % of dilution comes down);
- Then, if we have normalised 10-15% margin instead of the 7% in the above cases, SGH can be over the $1 mark if dilution is kept under 80%.

3. Banks don't want to own shares in SGH, so that would prevent a full DE swap
4. But banks probably don't want to extend loan further other wise DE would not have been discussed or even published by SGH
5. There is no appetite by SGH to go private as explicitly stated by AG in 2016 FY preso
6. The only amount that needs immediate fixing is the $400m due in May 2018, banks probably don't want SGH to fold or go bankrupt or administration either, hence providing support and wanting to work something out.

Based on the above, I think the result will be that banks will put up with DE, not for the full debt amount, but enough to gain majority control for the bank, retire the 2018 debt or portion of it, and DE the remainder so SGH will have room to recover and avoid insolvency. This way, banks are also not only Debt holders, but also shareholder which can influence the board, and look at replacing management if required.

Another piece that may buy SGH more time is that the PIP seems to be taking effect, business goes through its cycles so revenue is down, but the cost is also now more in control. So that may make the banks a bit more willing to support as well.

On the options side, other recap options are not being discussed here, what about convertible notes? Preference shares? any thoughts?

Any ways, I wish I had sold out at the 30s and 20s, so I can take another shot at buying now. But missed that. Short term wise, SP can bounce between 10-6c, but I think we have a good chance to turn it around, just like Feb 2016.

Good luck to all, DYOR.
Regards

Jack

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