Ann: SGH Successfully Agrees Bank Facility Amendments-SGH.AX, page-202

Tim - Mel (who is a lot more bullish than I am about SGS - the business acquired from QPP) has made a lot of posts on the subject throughout the time he has been posting on here. In the lead-up to the business being sold by QPP, as an investor in QPP he was convinced the business was being sold for less than its fair value. I was content the sale was necessary and that the QPP directors knew what they were doing. Ditto the team of 80 or so SGH people who did all the work pre-acquisition. Fairly priced deals should leave both sides feeling vaguely unhappy about the consideration passing. I didn't gain the impression SGH was that disappointed.

The latest numbers SGS was producing weren't known to QPP shareholders when the deal was done. I had worked out the business (which had been consistently growing, both organically and through acquisitions, over the whole period I had looked at - roughly early 2013 onwards) but was consuming cash until early 2014. By the time the Q3 2014 numbers were produced it was finally generating positive cash flow, which was supposed to continue to grow, with the growth aaccelerating as a result of the arrival in volume of NIHL case income. This has, however, continued to disappoint. In their reprt issued in March 2015, PwC commented that the accounting policies adopted (which were bound to be about the value of time booked to WIP and profit recognition) were 'inappropriate' (ie the income hadn't shown up). Other policies adopted were held to be at the aggressive end of acceptable - par for the course in a lot of companies using their paper to make acquisitions.

After the sale of the PSD (now SGS), the new QPP directors restated all the 2013 and 2014 numbers onto a practically 'cash basis' of accounting - right at the other end in the 'aggressivess' stakes - probably because they wanted to make the task of booking future profits as easy as possible (it's always done when new people are appointed - clear the decks and blame the old lot - we may have had an element of it with Houghton being appointed; "may as well be hung for a sheep as a lamb, Andy. It's only the half year - the share price has been slammed anyway by all the shorting after your clumsy accounting errors and consantly changing updates, you dipstick - then there was that all UK Budget nonsense").

I don't want to go on. As far as I'm concerned SGH made $125m last year (which was a 'normal' one apart from the activity right at the end. This was after adding back once off acquisition and other costs in connection with the acquisition (only one month of SGS was consolidated, which won't have made much difference to anything). I doubt there'll be anything much worse than break even in SGS for the full year - certainly not in a normalone going forward beyond 2016. I don't say I'm right but there were a lot of 'first year' costs written off in H1 2016, plus removals/closures and the other usual paraphernalia you get with an acqusition of any size, which shouldn't recur in any volume in the future.

So, moving forward, why would SGH - as a group - make any less than it did last year in a normal year? Unless AG & Co really did get it hopelessly wrong and more than doubled the size of the group for nothing, after spending $1.2bn or whatever it was to do so, it's likely SGS will yield profits and cash flow to some extent and this would add to the $125m I'm working on. This year has been an abnormal one (I exaggerate!) but to pretend every future year will be abnormal too is illogical. Both SGH and WTG (ex QPP) recently said they expect NIHL income to be of the order of $100m in 2016 and it's likely that case resolution speed generally will increase as a result of SGH waking up to the problems and throwing resource at them. To the extent the last two issues can be (or have already been) resolved, this will add to profits.

The issue of the company being badly over-geared (it was overgeared before the acqusition imv) has to be addressed if cash generation as a result of profitable trading isn't going to fix the problem in a relatively short time frame.

So in simple terms (just the way I'm looking at it - I'm not advising anyone) the company's market cap at 60c a share is $212m. Minimum normal earnings as above ashouldn't be less than $125m. P/E ratio? Less than 2. Expected P/E ratio? 10 - 15?

Make up your own minds. Let's get 2016 out of the way first, learn the lessons and leave it behind. As long as SGH keeps its reputation all will be OK. That's what outfits like "The Australian" and "Motley Fool" are trying to destroy. It would be interesting to find out why.

GLAL