Ann: Chairman and CEO Address to Shareholders 2016-SFH.AX, page-12

@natnicnak,

Thanks for your frank response to my post.

I've tried to answer each of your individual points below.


1. Rivers, which incurred a $10m EBITDA loss in 2016, will be moving to profits in 2017, as stated by the Board. This gets you circa positive $35m EBITDA for 2017, assuming nil growth elsewhere (online continues to grow sharply and cost reductions from initiatives such as centralisation of warehousing - see media releases "Toll" etc, Katies and Millers new store formats increasing sales at these stores some like for like by 15%, effect of new Myer concession store roll out etc), which is fine for this analysis. (Rivers lost some $20m EBITDA in 2015 and reduced to $10m in 2016).

Yes, the loss-reduction at Rivers, should it be realised, would indeed provide an earnings lift.
But given the series of disappointments since Rivers was acquired, I wouldn't see those savings as being too sustainable or bankable. Let's face it, that isn't exactly quality earnings growth.

You mention the prospect of nil growth elsewhere and while I know that was just for the sake of discussion, but it does concern me that the earnings momentum in the business has been negative for some time (due to an adverse mix of numerous unrelated factors), and I therefore think there is a risk that any turnaround, should it happen, is not sustainable. Which would mean that under certain consumer sentiment scenarios, the $10m benefit from lower Rivers losses, could quite quickly be eroded away by a lack of traction in the core SFG businesses.

PS. Your mention of warehousing centralisation jogged my memory about something that I read in the notes to the company's 2016 financial accounts (as part of Note 33 on page 65 of the 2016 Annual Report, namely: "The Group has entered into a contract for warehouse management services for the next 5 years, which will give rise to an estimated annual expense of %24 million."

Do you (or does anyone) have a view on what the financial trade-off for this additional cost is for SFH?



2. Expected net debt being $nil at 30 June 2017. At $35m EBITDA ($25m for 2016 plus the $10m Rivers loss = $35m), less some circa $14m total capex ($7m existing stores and allowance for $7m for new stores and IT etc). At $35m, continues to be well short of an EBITDA to sales of 7% - 10% (sales in 2016 were $824m, making good progress to hit $1bn in a few years).

Not sure how you got Net Debt to be nil @ 30 June 2017.

Even assuming your $35m EBITDA number (and I see some risks around this figure, but I'll give you the benefit of the doubt), off that you need to deduct interest payments of some $4.0m, which leaves you with Operating Cash Flow of $31m (and that assumes no further working capital investment is required... and remember, working capital has consumed $34m of Operating Cash Flow since the Rivers acquisition (although last year some $15m of working capital was released again)

So, $31m of OCF, less your $14m capex figure, leaves $17m of Free Cash Flow.

They existed FY2015 with a Net Debt balance of $51m.

Meaning they will - on the above figures - end FY2017 with Net Debt of $34m.


4. Consequential EV of existing market cap of $97m.

Based on the above, more like $130m



5. Stabilisation of AUD/USD (between 2016 and 2017) currency impacts as compared to significant deterioration between 2015 and 2016 financial years; by far the largest impact on gross margins, I'd guess in the region of $20m for 2016 .
Pundits fear sales in the sector were soft due to milder weather start to Summer in eastern states in December half year which is impacting sentiment.

Here we start to enter into the realms of forecasting macroeconomic variables, which I am strongly disinclined to do as the basis of for making an investment (for reasons that I observe very few well-trained, well-resources economists working for pre-eminent financial and research institutions are able to do well on a sustainable basis, so what chance do you nd I have at getting it right?)

Therefore, I have no idea what the A$:US$ exchange rate will do, nor how the consumer confidence cycle will play out for SFH.