Ann: Half Yearly Report and Accounts, page-2

Not entirely sure what to make of this result.

The first thing that jumped to my eye was the ongoing squeeze in Cash From Operations (before interest and tax), resulting from the combination of declining revenue and increasing operating costs.

Cash From Operations (CFO)

1H19: 126mNZ$

2H19: 101mNZ$

1H20: 76mNZ$

I see CFO as providing a better picture of the underlying operating performance here as opposed to EBITDA, which in 1H20 was affected by the first-time adoption of NZ IFRS 16; under this new accounting standard, lease costs are expressed as depreciation of right-of-use assets, which ends up inflating the EBITDA line.

Once adjusted for the increase in Depreciation (+16.5mNZ$) associated with NZ IFRS 16, the reported EBITDA of 89.7mNZ$ becomes 89.7mNZ$-16.5mNZ$ = 73.2mNZ$, which is close enough to the corresponding CFO figure; in other words, no issue with cash conversion, but the underlying cash-generating power is dropping fast.

In addition to that, the ongoing investment requirements (Capex and acquisitions) necessary to turn the business around mean that the Company is currently not generating any surplus capital, as shown by the increase in Net Debt over the six-month period (see slide 21 of today’s presentation, enclosed in today's announcement above).

What this means to me, in the context of my investment thesis, is that SKT is no longer a deleveraging play, and has become critically dependent on whether the investment that is being made in the business will succeed in stabilising (and ultimately growing) revenues.

If they do succeed, and looking at the residual underlying net cash generation capability of the business (CFO after interest and tax currently showing a run rate of ~100mNZ$ pa, once the timing of interest and tax payments is factored in), then the Company does look cheap at its current Market Cap of ~270mNZ$.

But, until that stabilisation occurs, and my guess is that it will take about a year before any evidence of that emerges, this has become a wait-and-see situation for me.

On the positive side, it doesn’t look like the recent Lightbox acquisition caused any further dilution or balance sheet strain, with a cash payment of just 6mNZ$ followed by a deferred consideration for the fair value of prepaid content rights (yet to be determined).

My two cents only.