SGH (ASX) D4E ratio

Originally posted by Grant62 ↑

Mike, as the saying goes, sometimes the Company and its management actually end up providing their own guidance on matters such as these, if not directly, then in terms of future expectations, risks and /or results.

For DCF to work, there needs to be positive business contribution happening (ie: CF+). It can’t just be revenue growth if, for example, OPEX is not cut or matched in tandem. Hence why their PIP program is far from completed. In fact, it’s barely even started judging by some of the following figures (from SGH’s own books /accounts).

That said, SGH has not offered up any DCF analysis of its own for valuation purposes. It has however offered up some insights into both its future growth prospects, as well as its near term performance prognosis and its near term business risks. These have all been captured as part of their fair value impairment testing.

For fair value impairment testing, they have been using, for several years now, relevant discounting, and terminal rates, in an effort to determine the PV of FCFs, etc. Whilst not exactly considered a DCF model /valuation technique, there are many similarities involved. But that's for others to check upon and assess. I do however agree that depending upon the appropriate discount rate that is used, proposed projects, activities and /or valuations can be seriously crimped, or advanced as, in many cases, it ends up being heavily subjective NWS that it's actually intended to be objective. The subjectivity often arises however because of a broad failure to actually explain the underlying assumptions that have otherwise fed into determining the appropriate discount rate.

That said, here are some of SGH's own "house" numbers that have been applied down through the ages:

Column 1 Column 2 Column 3 Column 4 Column 5

1 Year
Operations applied to
Discount Rates (post tax) applied
CF Years
Terminal

2 H17
UK – all
15 – 22%
10.5
2

3
AU
Not stated.

4 F16
UK – SGS
9.25%
5
2.5

5
UK – Law (PIL, GEL)
9.25%
5
2.5

6
AU
9.25%
5
2.5

7 H16
UK – SGS
9.25%
5
2.5

8
UK – Law (PIL, GEL)
9.25%
5
2.5

9
AU
10.5%
5
2.5

10 F15
UK - SGS
10.45%
5
3

11
UK – Law (PIL, GEL)
9.25%
5
3

12
AU
9.25%
5
3

What this suggests (from SGH’s own perspective ) is that:

The risk standard of the business (particularly in the UK) has deteriorated). For example, was 9.25%, but now is 15 – 22% (not differentiated however between whether UK Law or SGH.

To try and get to a robust position, the cash flow tracking /modelling has been pushed out.

But equally, the terminal growth rate has also deteriorated (from UK 3% in F15 to 2.5% in F16 and 2% in H17).

Putting all this together, the UK (in particular) is not being factored upon to improve its performance /operations any time soon.

As for whether the business is actually cutting well enough into OPEX, the following suggests that it hasn’t done sufficient of this to date. Indeed, the “core” surplus (arguably, one can call it net cash /cash profits, assuming the revenue conversion occurs as stated according to SGH’s own figures. It also suggests that on this particular metric, the business actually peaked in 2H14 just prior to the AU, UK and SGS acquisition sprees of F15 duration all occurred (ie: Nowicki, STOB, Bannister et al in Australia, Walker, Leo Abse etc in UK law and SGS) è note the net revenue surplus which peaked at $77.7M in 2H14, remained near enough to this at $77.3M in H15 then dropped marginally to $67.3M at 2H15 before then falling heavily to $33M at H16, falling even more dramatically to -$133M at 2H16 before improving (albeit still negatively) to -$43M.6M in H17:

Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 Column 7 Column 8 Column 9 Column 10 Column 11 Column 12 Column 13

1 Item

H14

2H14

H15

2H15

H16

2H16

H17

F14

F15

F16

2

3 · Revenue

178.3

259.9

267.7

330.5

487.5

420.7

322.7

438.2

598.2

908.2

4 · Bad debts

2.2

4.7

2.6

9

29.5

9.8

6.8

6.9

11.6

39.3

5

6 · Adjusted Revenue

176.1

255.2

265.1

321.5

458

410.9

315.9

431.3

586.6

868.9

7

8 Primary cash expenses

9 · Salaries and employee benefit expense

89.7

110.6

121.4

141.9

215.8

200.5

167.1

200.3

263.3

416.3

10 · Cost of sales

0

0

0

16.7

101.2

69.1

48.5

0

16.7

170.3

11 · Rental expense

8

14

13.6

14.2

19.4

18.8

13.5

22

27.8

38.2

12 · Advertising, marketing and new business development

15.7

17.1

18.2

38.1

89.1

47.5

43.9

32.8

56.3

136.6

13 · Administration and office expense

14.6

21.8

20.4

23.8

49.4

43.1

37.1

36.4

44.2

92.5

14 · Consultant fees

1.8

3.1

2.8

3.8

11.7

24.5

11.2

4.9

6.6

36.2

15 · Other expenses

4.4

6.9

8.7

7.2

17.9

16.6

12.6

11.3

15.9

34.5

16 · Finance

3.8

4

2.7

8.5

15.5

23.8

25.6

7.8

11.2

39.3

17

18 · Total Expenses

138

177.5

187.8

254.2

420

543.9

359.5

315.5

442

963.9

19

20 · Revenue surplus

38.1

77.7

77.3

67.3

38

-133

-43.6

115.8

144.6

-95

21 · 3P trend

64.4

74.1

60.9

-9.2

-46.2

55.1

22 · Weighted (20:35:45)

69.6

72.9

56.1

-33.1

-58.6

31.0

Expand

the terminal growth rate has also deteriorated
Dont you mean the terminal discount rate for cash flows outside the nominated period(s) have improved ?

No.	Vol.	Price($)
5	1766	$48.04

No.

Vol.

Price($)

1766

$48.04

Price($)	Vol.	No.
$48.30	498	2

Price($)

Vol.

No.

$48.30

498

No.	Vol.	Price($)
4	4216	47.950
1	670	47.850
3	1200	47.500
1	350	46.650
1	435	45.800

No.

Vol.

Price($)

4216

47.950

670

47.850

1200

47.500

350

46.650

435

45.800

Price($)	Vol.	No.
48.750	543	1
48.800	1116	1
49.000	350	2
49.490	97	1
49.750	98	1

Price($)

Vol.

No.

48.750

543

48.800

1116

49.000

350

49.490

49.750

(20min delay)
Last $48.04		Change -0.460(0.95%)		Mkt cap ! $19.55B

Open	High	Low	Value	Volume
$49.28	$49.58	$48.04	$25.25M	522.6K

D4E ratio, page-389

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	Column 1	Column 2	Column 3	Column 4	Column 5
1	Year	Operations applied to	Discount Rates (post tax) applied	CF Years	Terminal
2	H17	UK – all	15 – 22%	10.5	2
3		AU	Not stated.
4	F16	UK – SGS	9.25%	5	2.5
5		UK – Law (PIL, GEL)	9.25%	5	2.5
6		AU	9.25%	5	2.5
7	H16	UK – SGS	9.25%	5	2.5
8		UK – Law (PIL, GEL)	9.25%	5	2.5
9		AU	10.5%	5	2.5
10	F15	UK - SGS	10.45%	5	3
11		UK – Law (PIL, GEL)	9.25%	5	3
12		AU	9.25%	5	3

	Column 1	Column 3	Column 4	Column 5	Column 6	Column 7	Column 8	Column 9	Column 11	Column 12	Column 13
1	Item	H14	2H14	H15	2H15	H16	2H16	H17	F14	F15	F16
2
3	· Revenue	178.3	259.9	267.7	330.5	487.5	420.7	322.7	438.2	598.2	908.2
4	· Bad debts	2.2	4.7	2.6	9	29.5	9.8	6.8	6.9	11.6	39.3
5
6	· Adjusted Revenue	176.1	255.2	265.1	321.5	458	410.9	315.9	431.3	586.6	868.9
7
8	Primary cash expenses
9	· Salaries and employee benefit expense	89.7	110.6	121.4	141.9	215.8	200.5	167.1	200.3	263.3	416.3
10	· Cost of sales	0	0	0	16.7	101.2	69.1	48.5	0	16.7	170.3
11	· Rental expense	8	14	13.6	14.2	19.4	18.8	13.5	22	27.8	38.2
12	· Advertising, marketing and new business development	15.7	17.1	18.2	38.1	89.1	47.5	43.9	32.8	56.3	136.6
13	· Administration and office expense	14.6	21.8	20.4	23.8	49.4	43.1	37.1	36.4	44.2	92.5
14	· Consultant fees	1.8	3.1	2.8	3.8	11.7	24.5	11.2	4.9	6.6	36.2
15	· Other expenses	4.4	6.9	8.7	7.2	17.9	16.6	12.6	11.3	15.9	34.5
16	· Finance	3.8	4	2.7	8.5	15.5	23.8	25.6	7.8	11.2	39.3
17
18	· Total Expenses	138	177.5	187.8	254.2	420	543.9	359.5	315.5	442	963.9
19
20	· Revenue surplus	38.1	77.7	77.3	67.3	38	-133	-43.6	115.8	144.6	-95
21	· 3P trend			64.4	74.1	60.9	-9.2	-46.2			55.1
22	· Weighted (20:35:45)			69.6	72.9	56.1	-33.1	-58.6			31.0

D4E ratio, page-389

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