MME cash is tight I agree with your comments and note Wilma85’s...

MME cash is tight

I agree with your comments and note Wilma85’s re an equity raise. MME’s stabilised profitability is welcome, but the update shows that MME is still tight for cash. The PEP loan is fully drawn at $50m and must be repaid by Nov 25 (unless PEP agrees to extend it). Also, as you and others point out, the PEP interest rate is extremely high, and much more than MME’s FY24 return on equity: this will persist medium term as MME is unlikely to pay tax for 2 or 3 years. It was a pity that MME expanded so fast in FY22 and didn’t raise equity earlier when it could at strong prices, before it took on the PEP loan. These factors (and Covid angst in the markets) left MME desperate for a very dilutive equity raise at 8c in May/ June 23. The balance sheet is stronger now but- although MME is much less exposed to risk of covenant breaches- it still has to deal with PEP by Nov 25.

[Please see my post On 09/08/24 Post #: 75149218 in response to danbradster 08/08/24 Post #: 75126223 He spotted some important points that I had missed when I first read this update. IF the audited results agree with the update, the 2H profit was $17m. I estimate that of this about $9m was because of a release of some of the provision for credit losses, on top of an underlying 2H profit of about $5m to $8m.]

The update reveals that at 30/6/22 Unrestricted cash was $20m

Undrawn securitisation facility limits were $566m with a footnote “Use of this funding is dependent upon MME’s ability to co-invest in the securitisation junior notes”. That means a contribution by MME itself of at least 5% of whatever they want to draw on these facilities. If for example MME want to write net new loans of 10% of the June 24 amount (ie $122m ) that will require at least $6m cash to be invested by MME in the funding trusts, which will have to come from its unrestricted cash pool. If MME wants to use all of the $566m undrawn capacity that would need (unrestricted) cash to invest at least $28m into the trusts.

However, there is usable (unrestricted)cash of only $20m to cover three things: general working capital, ability to make even a modest use of the undrawn funding trusts limits and, most importantly, repay $50m to PEP. Net assets are $190m but include intangibles and goodwill. Based on prior accounts that’s likely to include about $96m for goodwill and intangibles (almost entirely acquired through the SocOne buy) so tangible assets are only about $94m To refinance (or extend) the full $50m PEP loan is a tall order. I’d like to hear opinions whether banks would agree to lend as much as $50m to refinance PEP, against this balance sheet. $30m should be OK, but I’m dubious re $50m. And I can’t see how MME will generate cash from operations in FY25 beyond an amount equivalent to likely pre-tax profits of say $12-20m Since unrestricted cash is only $20m at 30 June MME will face the bind of needing to invest cash for growth in the funding trusts, but retaining cash to repay at least part of the PEP loan. The best solution may be for PEP (or a similar non-mainstream lender) to agree to extend the full $50m loan for 18 to 24 months, but that will be very expensive.

nta share is 12c; nav/share about 24c. Market price is only 9c. A 1 for 4 equity raising at 10c to raise $20m before costs would today be very hard. If MME can eventually convince the market that it can make a $20m profit in FY25 that would be 2.5c earnings per share. IF that was believed, and for the share price to rise to the NAV level of 23c, that would be a PE of 9 which alas is quite high in this languishing sector. Many of MME’s figures are good, and it seems to have turned the corner, but its capital base is still sobering. Of course a takeover, or large strategic investment by a peer, would solve all these problems and greatly improve sentiment.

I have a large holding and hope that release of the full annual report will be well received. I don’t want to be downbeat but this may be a slow grind upwards.

As an aside Note 11.3 of the 2023 AR provides a discussion that justifies making no impairment to the carrying value of SocOne’s goodwill. The list of key assumptions is fair enough except for the first one, which is for four years of 22% pa compound growth in assets. That might be achievable with no constraints but I can’t see how MME can achieve that with the cash constraints I discuss above. I wouldn’t be surprised if they reduce that growth assumption and perhaps impair the goodwill. If they keep the goodwill at $63m it will be instructive to see what they say in the 2024 AR to justify that. This doesn’t affect cash flow or operating profit, so is not a big deal, but the accounting treatment will tell us what the Board thinks of SocOne’s ability to grow.

DYOR