29 February, page-6

Yensog
As U know I come from the other end of the discussion. I agree and 29 Feb will be interesting.

However consider this. It is all about ROCE in the end and high returns will be rewarded better than low ones so it is always worth having a look under stones to see what is there. Lets assume the UK SGS ( Quindell) is as profitable as most expect and, however it is achieved, perceptions are that the group has appropriate finance and profits are sustainable. Management can then look at opportunity.

Imagine the SGS business model could be replicated in OZ. ( Well the model has been described as having :
" Higher than average margins/ batch processing speeding case process time/ lower than the norm legal overheads" ) ...dont you think that would increase Oz earnings?

Since you would have regular contact with actuaries ( the gods inside insurance companies) you might ask them what is likely to be really exiting in their world. The response might be " well if we had actual evidence of every driver - we could feed that data into every motor ins quote - using high price to sidestep the really bad drivers- and lowering premiums for the drivers we really want , the ones who drive well and never claim. My insurance company would probably double its profits and my bonus might treble.

So if SGS Australia said it could do that ( the data management and telematics bit) - how much closer do you think SGA Australia would get to the customer insurance companies?

I grant you SGH has first to fix perceptions about profitability/ cash generative ability / loan capital repayment ability. However :

1. UK WTG ( Formerly Quindell ) is "totally tucked "with profits coming in year oatcake, although it has $100m in escrow and probably $200M cash in excess of the amount it needs to feed its data management/telematics business.. It ( I think - some trollically dropped into that trap and confirmed that) also has around 350M in B/F tax losses. $300M cash injection + Tax losses it can use would be handy in SGH right now and in all probability underscore that fact that SGH's future profits are valued by the market at less than one times profits. Abnormal. Normal would be at least higher than 10.

2. Meanwhile with profits in "not soon at all land" and excess cash, WTG is valued by the market at around 1/3rd- 1/4 net disposable assets. Totally tucked and bonkers and not a few trolls about?

If there was to be a merger I cant help thinking you could forsee:

1. Events in the UK ( where 70% of group profits expected) bringing about as rapid a rise in the SP
as the fall.
2. SGS Oz chatting up the actuarial types in OZ insurance companies ( Leading to easy profits as SGS telematics is installed in Oz cars and SGS does the data management bit for the OZ ins companies)
It IS the future whichever company does it.
3. Hearing Losses cases coming to an end and the bulk of them settled in 10 months? Bringing about
a $150M reduction in the cash tied up in work in Progress. Overall Borrowings down to about $500M
4, Post a merger in 2016 that would mean net borrowing at around $200m ( Trivial) and tucked away would be tax losses b/f ( Currently in WTG) which would help insure not a lot of tax is paid on profits for a bit.
5. Sniff of a merger might double SP overnight
6. Dividend assured. ..............I can see monacle falling into the porridge cauldron,
7. SGH and WTG shareholders both benefiting SP wise
8. SGH would have a big In in Canada ( through WTG subsidiary "Ingenie")
9. Me forgiving Joubert. ( second thoughts - you will have to wait on that one)

The difficult bit would be ringfencing enough cash to incubate and grow WTG telematics,
The easy bit would be the sale of WTG canadian clinics [ + $75M cash?]

Maybe a point you can not afford to miss is that the main part and main opportunities for SGH are now overseas and with the right strategic thinking , the future could be easier to map out than some .
think.

Mel