T1brien
1. Do you understand the significance of a Price Earnings Ratio as a measure of relative value in shares.
2. Do you disagree with Edison Research and Wilson Research . The average of their EBIT projection is $280 EBIT yr to 30 June 17
it would be fine to disagree but they wont be out by more than 20% . So 20% less would give you $224M EBIT.
3. Even a non accountant might agree that over $200M EBIT is a REALLY easy expectation on £1B turnover
4. Do you know that QPP PSD slowed down case processing in the 4 months up to the deal and SGH did not fuel up SGS ( new name for QPP PSD) until after a HUGE office move. The near breakeven performance of SGS 6 months to Dec 15 was NO surprise to me.
Fueled up - SGS has the capability to make $200M EBIT on its own .....I expect $150M in the year to June
5 In fact I expect SGS to make $150M EBIT in the year to June 17 I assume SGH aus will make $60M +
I dont have a feel for UK legal services but let us assume that can come up with $10m. So in a bad year $220M EBIT. ( I bet ist more)
SGH has no problem making a profit
Let us then assume wit plenty prudence PAT exceeds £180M and that the stock market should value it at 13 times profits.
Reasonable because Redde ( smaller but very similar to SGS quasi legal services) is vaullued now at 17.5 times profits.
THAT would mean the stock market capitalisation of SGH would be $2.3 Billions.
I am excluding the likelihood that NIHL cases divy up $50M Profits in 2016/17 because it is one off non repeating profit ( but handy)
6. Nobody is arguing SGH does not have the easy capability to make $180 m PAT next year. I trust you don't disagree.
7. The market quite reasonably has a problem with $726 m DEBT. Only a twit cannot calculate that the exit from NIHL ( acquired free after $144M spend by QPP.......and to end of case cycle $100M SGH spend) will not ( assume 50% success) deliver NET cash of $150M. the reduction in case throughput by 10-15% will over a case cycle harvest C $60M cash.
Only a half wit could not expect all this and that debt will be reduced to C $500 m by June 17.
The TRUTH IS $500M is a debt level commensurate with $1B turnover $200M EBIT and is clearly affordable.
I would bet the banks are a bit twitchy over NIHL but when and if NIHL is working to plan the twitchyness would cease.
8 . What exactly has the management done to eliminate value. Anyone like me in the UK knows the public mood is not for TORT elimination or bashing the poor. GO has climbed down twice on poor bashing, His reforms are 18 months 2 years away and I bet my bottom dollar they will be watered down. That means write downs by SGH for SGS are likely to reappear as higher profit margins.
The 15 % WIP reduction/case reuctions in Uk are going to achieve supernormal margins because WIP has been written off.
I happen to have been involved in a lot of discussions about appropriate WIP valuation policies. To understate profits by undervaluing WIP is close to fraud if overdone and its obviously routinely done in smaller professional practices. Statistces provide less proof in small practices but for a big beast like SGS the cases are in the main uncontentious and stats can prove value in WIP. I actually disagree with the new SSAP and believe it will sap finance from the legal profession. It will in fact make it more. not less, difficult to competewith SGS on economies of scale/batch processing / case take up methodology. The New SSAP will help accountants lawyers and other professional unlisted practices to lower taxable profits. In my book . its cheating.
The lowered SP has been brought about by :
1. INstitutions exit when SGH fell out of AUX 100
2. GO reforms ( which I expect to be so watered down as to be unrecognisable) and consequebt SGH WIP write down
3. ACIS investigation - now resolved with no blemish
4. New SSAP and New FD sweeping clean to clear decks.
5. Overdone WIP write downs ( A Fudamental base in accounting is consitent acc rules period on period)
.6 and actually by previous owner of SGS when they converted theor loss on sale int a profit by writing down past WIP
.........it has meant you have to get the calculator out to calculate actual profitability in SGS.
......... You and many others have not done the sums which will I assure you lead to SGS spitting out $150 - $200 EBIT in future
..........SGS isnt really a solicitor - it is an insurance co service company - cases can be batch processed.
In my view the board has been sensible in every respect although I would have found a way to have NIHL treate d as a separately financed , almost off balance sheet exercise. Cosmetic that might be but it would have highlighted the temporary nauture of capital tied up in NIHL.
Now I know you are probably not a numbers man and PE isn something you think about much but do note that every expected future dollar of profit in similar Redde is valued at 29 times more that the expected dollar profit in SGH. That is insane . The total no of shares has been sold many times over in the last 7 months as it has been crawled all over by shorters. The weakness will go as SGH sheds NIHL, gathers in NIHL cash and profit and then has clearly affordable debt. In fact the minute SGH can tell that NIHL is going to plan then in my book the weakness will have gone.
I admire AG's ballsy approach and when he delivers the profits I am almost sure of in 2016/17 most will salute him and SGH achievements..
I dont however disagree with anyone who says SGH needs some big hitters in the UK....or that Skippen looks old and tired while Houghton looks as if he is well on top of he game.
Mel
Mel
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