If we look at the pattern of announcements from the previous...

If we look at the pattern of announcements from the previous years, there was an investor update webinar for the H1 results. So not having one this H1 came as a surprise to me as well.

On the first glance of the results, I felt disappointed as negative EBITDA exceeded more than $1m of my expectation. The H1 gross margin of 17.8% is lower than my estimate of 20-21%. So what happened?

I believe, the one biggest factor that impacted the performance is the depreciation of the Euros vs the US$. Ivory Coast project is denominated in Euros. The EUR160m was worth close to US$200m at the beginning of last year and is only worth slightly less than US$160m now. I am not sure what the cost is based on, presumably equipment in USD, wages in local currency plus a combination of others. Euros is badly hit in the last 6 months dropping from $1.14 to $0.99 vs USD, so for our revenue US$42.9m from IC in the first half, gross margin must have been slashed just on this alone. The long term fixed deposit corresponding to the performance bond for IC project now standing at about $11m similarly would get hit if it is based in EUR. Italian assets held for sale would also suffer the same fate.

So looking at the gross margin again, I think the probable scenario is:

CES (IC) 12%; GP = $5.12m
CES (non IC) 15%; GP = $0.33m
SPS 33%; GP = $3.6m
Recurring 40%; GP = $1.68m
Gross profit for H1 = $10.73m. (based on the above margin assumptions)

Actual:
Rev = $60.17
less Cost of sale = $49.45
Gross profit = $10.72m

From the H1 report, we are pre-warned on margin contractions on IC as it comes closer to the final stage of the project. I suspect at this is probably the stage where the mechanical equipment, filters etc comes in, and are usually USD denominated. The fortunate part for us is this final 25% of the project would only account for about $45m revenue and the impact to gross profit contribution becomes gradually smaller.

With forecast revenue of $46m for SPS for the year, there is at least $35m for the H2. If 33% remains as the gross margin, just on SPS alone, the gross profit would be around $11.55m. Plus the recurring, CES and a bit from IC, I think the picture is brighter in H2.