Well, this is a interesting update. The AFR was pretty much right with the 95% dilution.
I don't think the share price has moved much at the moment, as the vast majority are retail shareholders and don't understand the full impact of what has happened. If there were major institutional shareholders, they would have sold out today on this announcement.
Key points for me:
- 95% dilution plus Warrants = 96%. There is a big difference between 95% and 96% for existing shareholders. I know it doesn't seem like much, but this is significant in terms of what you end up with. With a zero strike price on the warrants and three year timing, this is a nice bonus for the Lenders and is a bit "hidden". So, 96% dilution is guaranteed.
- Debt. This reduction is a great result for the business. Having such minimal debt makes life alot easier: ^Senior secured debt - A$35m (comprising A$30 amended (existing) facility and A$5 new facility) ^Working capital facility - A$40m (existing)
- UK convertible notes - GBP250m. This is very important. These ring-fence the WTG claim, plus also any money on sale of subsidiaries in the UK. Current shareholders cannot benefit from any WTG win (if any) or any reorganisation of the UK business.
- New directors, Grech gone. Inevitable that Grech was going and there would be a couple of other managers who will go too, I suspect. The Lenders will get control of the company and do with it what they need - new directors to lead the way, senior management supported and changed to get the job done. There would be a new team of accountants and analysts in there making sure that changes are identified and implemented. Great for the business.
Overall, what does this mean for shareholders? There was no good news for current shareholders, but at least most of the debt is gone and they haven't asked shareholders to kick in any money. But, the convertible notes make sure that there is limited upside with the UK business (WTG and sale of subsidiaries). Minimal debt is great. But with only 4% of the company now, that is a disaster (decimation plus). There has been no business update, so we can only assume that the company is breakeven, at best.
At 9c currently, the market is valuing the business at just under $800m. To me this seems way too high as it should be making close to EBITA of $80m this year or next (forecasted) and it just isn't even close to it. Given the recent results, upside potential (or lack of), convertible notes, comparing to equivalents (SHJ) and general market sentiment I just can't see this $800m valuation. If it was a great deal, those shorters who have just made significant amounts of profit (tens of millions) and closed their positions would now be buying as many SGH shares as they could, but the turnover today (about $700k currently) is not showing that.
The FY17 result will be poor and they will make sure that they write off and expense everything they can to start the new FY18 year without any skeletons in the closet. Would I buy your shares now? Absolutely not - still too many questions about how profitable the business might be and any upside is going to the Lenders, not the current shareholders. I would guess that the share price should be at least half of what it currently is. But, all of this is just my opinion.
SGH Price at posting:
8.9¢ Sentiment: Sell Disclosure: Not Held