Alex's Buddy Grant wants to close down half the company. Superb...

Alex's Buddy Grant wants to close down half the company. Superb idea. Then SGH would be making lots less money ..absolutely wonderful ...making less money would please who?

Another point worth making is about research. I spent 5 years as a lecturer in a business school. I was never a proper academic but did enjoy the easy life. I did develop radar . Research often means the person talking about it spends most of the day in bed and is so full of his/herself but uses the biggest words in the dictionary to tell us their research has found that, within 95% confidence level, 85% people are hungry when they get up. Its inconsequential and it makes them happy. ( Also a lot of cheating takes place in research when reputations are about)

Grant is probably 15 -5% correct however. Why? Management should always be looking to chop the weakest bits. ( 15%?) ...they make least ROCE.... and and there will always be 5% crying out as a money making area to invest in. After a big swallow takeover you can very the figs but a modicum of chopping is no bad thing. Common sense - and not backed up by BS.

Surely Grant would not wish to kill the golden goose? If you are reading this you are probably aware that the current debt level is too high and is making everybody twitchy in the absence of guidance after huge one off extra dollop of prudence in the way work in progress is valued and Goodwill in the balance sheet has been written down, and the write down has a one off effect on profits.

Alex and Grant have the advantage of RT. RT used to tell QPP shareholders that software/screening proceedures/economies of scale/lower cost of legal input ensured QPP PSD gross profit margins were 44% Vs normal gross profit in a legal practice of 30%. Well everybody always knew RT was a BS person too. Even so , using 33 % gross profit margins showed that on Turnover less variable costs, QPP PSD ( now SGS) should produce $150M profit contribution pa on its own. AG said it was an excellent model.
Chancellor Osbourne 's broad proposals may have a negative effect. They are incomplete proposals not enacted. I would be surprised if SGS's ongoing profit contribution is not well north of $100M , but £150m + in the next 2 years. If there is shrinkage here, it will save costs and/or allow SGH to devote capital to other segments of the legal market. Good profitability is highly probable from SGS on an ongoing basis.

Most of the NIHL cases which result in fees will probably settle after June 2016, and most before Apr .
17. The most optimistic estimates of net cash contribution from the 52000 Hearing Loss cases are close to $300M and the least optimistic $150M. Probably ( we just do not know) its around $200M.
The cash outcome will inform the directors and that banks what to do next.

If NIHL is 90% shrunk after 2 years and produces $200M net cash and all the rest of the group can
generate $60M cash contribution per annum from now on ( On $1000M growing turnover)
then the banks probably wont have a problem and the SP right now is bonkers ( Nice! if you have the gonads to be a buyer). It will be clear that ongoing PAT is above $200M and in anyone's language
that would make the current MC look ludicrous.

Conclusion
1. Banks see $150-250M net cash coming from NIHL . If its below $100 in 15 months - problem.
2. NIHL net cash gets Borrowings down to manageable level June 17.
3. Underlying profitability from 1 /6/16 after interest and tax $240M - £280m per annum
4. Non SGS part of group on the hook to generate $50M + cash pa. This may hamper growth
but more equity down the line could solve that.
5. It probably works and the directors know that. The MC and SP both daft.
6. Common sense often gets to a conclusion.
7. It wasn't me in the lift.

Mel