Ann: Market Guidance, page-90

WIP = future cash flow for the firm but at the same time change in WIP is also responsible for large chunk of current year earnings. Not discounting future cash flows is equivalent to not putting a lime in your corona

WIP is only a problem because it doesn't come back as cash flow until several years later and there is a degree of uncertainty over the amount. No matter how you want to slice it $1 dollar of WIP is not equal to $1 dollar of cash in the bank.

So if we take the time to do a valuation (instead of looking at one metric that already supports our pre- conceived idea about whether or not SHJ is a good buy) we will see that valuations based on earnings are completely different to ones calculated using cash flow;

I estimate intrinsic value of 72c with a typical unlevered cash flow dcf model but if I had used earnings my intrinsic value would be much much higher


So if I think SHJ is worth 72c and the share price is 55c why don't I buy?

1. Still thinking about long SHJ short SGH trade but suspending the dividend and poor guidance leads me to believe there is more bad news to come.
2. Cash flow projections are based on current WIP yet recoverability % is not set in stone. The historical rate was 85-90% but the recent write down tells us that this percentage is no longer accurate (thus my model will probably be off as its based on historic data).
3. The costs to produce WIP are incurred years before the company see any real value created for shareholders (this adds another dimension of risk).
4. There are better value propositions out there.