When it comes to discerning the dividend-paying propensity of...

When it comes to discerning the dividend-paying propensity of this company, or forming an assessment of its EV, I'd be reluctant to take my cues from the net cash balance in isolation.

Because, while the company does not have any borrowings, there are other not-immaterial claims on its capital, such as the remaining $10m Def. Con. for Trivantage, $13.5m in lease liabilities as well a high level of ongoing working capital (WiP-to-Sales averages a rather demanding 20%).

And then there is also the perennial capital provision that needs to be made for acquisitions, given this is an acquisitively-minded board (which, in its defence, it is compelled to be, given the severely limited organic earnings growth potential of the business).

SXE has spent around $70m on acquisitions over the past 5 or 6 years which is a  big number in the context of the $190m market value of the business today... it means that either the acquisitions were not all that value-accretive, the core earnings of the company have gone backwards, or the current market valuation is wrong (or, more likely I think, a combination of the three).

But whatever it is, the nature of the beast is that this is a business model that always needs to have meaningful financial powder kept dry; and at present company's balance sheet isn't exactly a dripping roast in terms of surplus capital:

Net Current Assets ($m):
FY2018:  50.2
FY2019:  59.1
FY2020:  67.5
FY2021:  35.5
FY2022:  30.3  (@DH2020)

Current Ratio (x):
FY2018:  1.8
FY2019:  1.7
FY2020:  1.9
FY2021:  1.5
FY2022:  1.4  (@DH2020)

So, based on those liquidity metrics, one of the reasons that the stock might appear to be so cheap is because some smarter heads might be of the view that there is a chance that the company raises capital at some point.

While I think the chance of a capital raising is not high, it is certainly not zero.
If pressed, I'd put the probability at 20% to 25%. [*]

This is a skinny margin business with high levels of working-capital intensity, so there is seldom much wiggle room when it comes to excess capital.

It's a business that needs a lot capital for operational flexibility, and at the moment it's capital position is tighter than it has been for several years (as I said, net cash alone is a poor indicator of capital position).

Meaning that, even if the board is generous in its declaration of the final dividend, it might not be too long after that it might be asking for even money back from the market.

Which is why pursuit of dividends is not the basis on which I'd invest in SXE.


[*]   To preempt the response questioning the logic of a capital raising when you have a net cash balance:  just because the company holds net cash, doesn't mean it won't raise additional capital; it raised $32m in DH2017 when the Net Cash @ 30 June 2017 was over $40m... although it is noted that raising was accompanied by a $9.0m acquisition, but still, they raised a great deal more than the acquisition consideration to bolster the balance sheet.


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