Ann: SWF - Section 249D Notice, page-12

Found the maths - for what it's worth: https://hotcopper.com.au/posts/55154744/single

Note:  Some of the numbers might be a bit stale now, but probably to an extent that requires revision to the bottom end of that 20c to 25c range (if for no other reason than the stock already being at the bottom of that range).

"Yes, there will always be some residual value for companies that fail to execute as successfully as their peak valuations had implied.

The question is how far we are from that point of residual value for SWF

I did a rough "at-what-level-takeover?" exercise in my head after the release of the latest App. 4C by crudely, annualising the June quarter figures.

In doing so, I assumed a hypothetical acquirer does so by viewing the situation, not in terms of accounting earnings (with the attendant acquisition accounting idiosyncrasies), but through a lens of acquiring a stream of cash flows.

So here is the pro forma Cash Flow Statement for SWF derived by annualising JQ2021 figures:

Cash Receipts = $20.5m
Product Manufacturing/Operating Costs = $11.5m (aka variable costs)
Fixed Cost Overheads (Marketing, Leases, Staff Costs, Admin + Corporate) = $8.5m
= > Operating Cash Flow = $0.5m

Investing Cash Flow = $0.1m

So Pre-Tax FCF = $0.4m

Now, assume a new corporate owner of the SWF would be able to strip as much as a third out of SWF's fixed cost overheads (so a reduction of ~$3.0m).

That would leave Pre-Tax FCF of around $3.5m.

Capitalising that at an EV/FCF multiple of around 12x (remember, we are working in Pre-Tax terms here) yields a theoretical acquisition EV of $42m.

The company had $7.5m in Net Cash @ 30 June 2021, and it has raised a further $10m after the balance date, so it is likely to be currently sitting on around $17.5m in Net Cash.

So that means an acquisition Equity Value of $59.5m, say $60m

And remember that acquisition equity value would have to include a premium for change of control; conventional wisdom says a 30% takeover premium is the norm.

So that equates to a market valuation immediately prior to takeover offer of:

$60m/130% = $46m, equivalent to 20cps


(Assuming more libertine assumptions; for example that the new owner will be able to chop fixed cost overheads in half, and will be willing(crazy) enough to pay 15x Pre-Tax FCF.

In this case Pre-Tax FCF would be $5m and acquisition EV and Equity Value would be $75m and $92m, respectively.

Adjusting for the takeover premium equates to Equity Value prior to takeover offer of $70m, or 31cps)


So, based on the above indicative (not prescriptive) exercise, I think that somewhere around 20cps to 25cps is where a takeover offer would make sense for a corporate acquirer.

Based on this, if I was ever going to be of a view to buying SWF, it would be at around the sub-$25cps level that I would commence accumulating, because that's where I see residual value at this stage."


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