Owner Earnings for the HY = $71M - $25M = $46M. If the company...

Owner Earnings for the HY = $71M - $25M = $46M. If the company just repeats HY1 in HY2 then Owner Earnings for the year = $92M. This is in line with revenue and EBITDA projections and I expect HY2 to be better. So Owner Earnings will probably end up being somewhere between $90M - $100M.

@mistaTea

Thank you for your added thoughts.

Your estimate of 90m$-100m$ in “Owner Earnings”, where you have essentially removed one-off Opex costs and then added back sustaining Capex, is pretty close to the 100m$ pa CFO run rate (after interest and tax) I mentioned in my post above; so, it looks like we’re thinking along similar lines, when it comes to quantifying the underlying cash-generating power of the business.

The only problem I see is that, as we speak, none of that underlying cash generation is translating into actual surplus capital, which can be either returned as dividends or used to add value to the equity by paying off more debt.

The reason, of course, is that Management are investing that cash (and then some) into growth Capex and acquisitions; which does make sense and is in line with what they said they would do, but I was personally expecting to see Net Debt come off a bit further (from its June 2019 levels), not increase.

Time will tell how much the current investments pay off, and what other acquisitions and moves they might make with the Owner Earnings available to them.

Sure, if those investments pay off, then the Company is trading at a very cheap multiple of its present underlying cash generation (as measured above).

The downside is that, if they don’t pay off and revenue does not stabilise, then the future FCF yield (i.e. the one that will actually translate into surplus capital) may be a lot lower. Plus, if Net Debt does not get further reduced while this investment phase goes on, while revenues keep declining, then [Net Debt]/EBITDA will also deteriorate accordingly.

I am still a Hold on SKT (after today’s result, that is), because I see the present [Cash From Operations]/[Market Cap] as being high enough to provide sufficient margin of safety against a) the time uncertainty as to when surplus capital generation will resume, and b) the quantum of that future surplus capital.

I guess the main change, as far as my own investment thesis is concerned, is that SKT has now morphed from a high FCF yielder (albeit with a declining FCF profile) into a proposition whereby all the FCF generation has been pushed forward into the future, with an element of binary risk as to what the future FCF will amount to and when.

As such, I will personally do nothing at current price, and will adjust my position going forward depending on how the investments being made end up improving (or worsening) the Company’s financial position.

Thanks again for your insights.