“I have absolutely zero confidence in the current team, the new...

“I have absolutely zero confidence in the current team, the new CEO having no prior experience running an actual tech company and the amount of people that hold high paying positions in this company which effectively merits them as worthless to their roles. The company has unfortunately turned into a cricle jerk of people on a board providing no additional developments to the direction to it's shareholders.”

@pradaxy8,

I’m no defender of this company’s current board and management (heck, I don’t even know them), but I don’t think any team of managers, no matter how good they happen to be, would be able to restore the fortunes of this company.

Reason being is that it is really a lousy business model, being a seller of a commoditised service as an industry minnow with limited ability to scale. A tough gig.

So, I don’t envisage any self-help from some kind of big strategic initiative to grow the top line; previous managers tried that before and it just ended up torching a whole lot of shareholder capital in the process for no real gain in anything, such as market share.

When it comes to restoring shareholder value, the one role I think that management can play is to cease all expenditure on new product development, shrink the operating cost base to its bare-bones, stay-in-business minimum, and to let the resulting surplus cash flow accumulate in the bank account, ultimately to be returned to shareholders.

My sense is that this is happening; we saw a bit of it in the SQ2023 result, but not as much as the latency for it suggests because that was the first period that the serious restructuring medicine was taken and so it included all the one-off charges.

So, I expect this upcoming result with demonstrate the first signs of the much-reduced cost base.

My sense is that investors have given up on this stock, so I’m not sure that market is totally on top of this cost-out dynamic, which I believe could me meaningful.

While I think that’s a necessary condition for investing in the stock at these levels, I’m afraid it isn’t a sufficient condition.

The critical condition that needs to be met is that the top line has to stabilise; i.e., clients need to cease pulling cash out of their trading accounts, given >70% of SWF’s Revenue currently comes from interest earned on the money belonging to their clients.

Not a very sound basis on which to support a business.

But all might not be lost; in fact, the company might be passing an inflexion point, due to developments outside of the control of SWF management.

For the sake of long-suffering shareholders in this company, I thought I might sprinkle a skerrick of hope, in the form of the following pictures, taken from this post from a few weeks back: (https://hotcopper.com.au/posts/71816644/single).

"I notice the ASX earlier announcing that daily trading volumes for December 2023 had turned positive compared to pcp (which, incidentally, was s multi-year all-time low)":







In the light of that chart, while thinking about stocks which are market-activity sensitive, I found myself coming to view the investment proposition for SWF in terms of the following matrix which, as can be seen, cross references Interest Rates with Trading Activity:





For self-evident reasons, the level of trading activity is usually inversely related to the level of interest rates.

In 2001, when interest rates were very low, trader numbers and trading volumes were very high (corresponding to Quadrant B in the matrix above); but trading activity has fallen over the past 12-18 months, as interest rates have risen significantly (so Quadrant C, where the company finds itself currently).

So almost all the time the environment for the company will reflect either Quadrant B or Quadrant C. Speaking generally, from a financial performance standpoint (and hence, from an investment appeal point of view), Quadrants B and C are both indifferent (hence, the dull Grey shading).

Quadrant D is obviously the least attractive (hence, the cautionary Red), while Quadrant A is the sweet spot, with improving trading volumes combined with still-elevated interest income on client balances (so, coloured Green. Investment-wise, impying Green for Go).

Based on the earlier parts of the post it looks as if the trading volumes have bottomed and are going to come in with positive 12-month variances over coming months/quarters (if only because the base periods being cycled are very weak ones).

Normally that would be accompanied by falling interest rates, which induce improved equity market sentiment; so, effectively a transition from Quadrant C to back to Quadrant B, with no real change to the investment proposition.

However, here's a greater than zero percent probability scenario that I think warrants contemplation:

It could be that market sentiment changes not because of, or in conjunction with, falling interest rates [*], but simply because investors feel that interest rates have completed their rise, even if they won't necessarily fall much, if at all.

In other words, a response not necessarily to the "It's getting better" scenario, but to one of "It's just not getting worse."

In that case, the transition might just be not from Quadrant C to Quadrant B, but from Quadrant C to Quadrant A, i.e., that "sweet spot" kind of scenario in 12 months' time wherein SWF is:

1.) reporting increasing trading velocity and trading revenue,

and

2.) still generating decent interest income on client balances (which would have ceased falling by then and may even have started to rise as traders return or as incumbent traders mobilise capital to their investment accounts).

If this thinking proves to be correct, then I suspect the stock price will be meaningfully higher than it is currently.

That all said, caveat emptor, because there is a potential hiccup in the form of the upcoming result, which could provide some kind of sticker shock if client balances continue to show a meaningful decline. As suggested earlier, this is the hardest variable in the investment thesis.

But after 18 months of it happening, I think we must be getting close to the asymptote of client withdrawals.


[*] For what it is worth, my sense is that inflation is going to prove to be stickier than some might believe (don't be fooled by media headlines, which focus on rate, instead of level), and therefore interest rates don't have much downside.