Mike, as the saying goes, sometimes the Company and its management actually end up providing their own guidance on matters such as these, if not directly, then in terms of future expectations, risks and /or results.
For DCF to work, there needs to be positive business contribution happening (ie: CF+). It can’t just be revenue growth if, for example, OPEX is not cut or matched in tandem. Hence why their PIP program is far from completed. In fact, it’s barely even started judging by some of the following figures (from SGH’s own books /accounts).
That said, SGH has not offered up any DCF analysis of its own for valuation purposes. It has however offered up some insights into both its future growth prospects, as well as its near term performance prognosis and its near term business risks. These have all been captured as part of their fair value impairment testing.
For fair value impairment testing, they have been using, for several years now, relevant discounting, and terminal rates, in an effort to determine the PV of FCFs, etc. Whilst not exactly considered a DCF model /valuation technique, there are many similarities involved. But that's for others to check upon and assess. I do however agree that depending upon the appropriate discount rate that is used, proposed projects, activities and /or valuations can be seriously crimped, or advanced as, in many cases, it ends up being heavily subjective NWS that it's actually intended to be objective. The subjectivity often arises however because of a broad failure to actually explain the underlying assumptions that have otherwise fed into determining the appropriate discount rate.
That said, here are some of SGH's own "house" numbers that have been applied down through the ages:
Column 1
Column 2
Column 3
Column 4
Column 5
0
Year
Operations applied to
Discount Rates (post tax) applied
CF Years
Terminal
1
H17
UK – all
15 – 22%
10.5
2
2
AU
Not stated.
3
F16
UK – SGS
9.25%
5
2.5
4
UK – Law (PIL, GEL)
9.25%
5
2.5
5
AU
9.25%
5
2.5
6
H16
UK – SGS
9.25%
5
2.5
7
UK – Law (PIL, GEL)
9.25%
5
2.5
8
AU
10.5%
5
2.5
9
F15
UK - SGS
10.45%
5
3
10
UK – Law (PIL, GEL)
9.25%
5
3
11
AU
9.25%
5
3
What this suggests (from SGH’s own perspective ) is that:
The risk standard of the business (particularly in the UK) has deteriorated). For example, was 9.25%, but now is 15 – 22% (not differentiated however between whether UK Law or SGH.
To try and get to a robust position, the cash flow tracking /modelling has been pushed out.
But equally, the terminal growth rate has also deteriorated (from UK 3% in F15 to 2.5% in F16 and 2% in H17).
Putting all this together, the UK (in particular) is not being factored upon to improve its performance /operations any time soon.
As for whether the business is actually cutting well enough into OPEX, the following suggests that it hasn’t done sufficient of this to date. Indeed, the “core” surplus (arguably, one can call it net cash /cash profits, assuming the revenue conversion occurs as stated according to SGH’s own figures. It also suggests that on this particular metric, the business actually peaked in 2H14 just prior to the AU, UK and SGS acquisition sprees of F15 duration all occurred (ie: Nowicki, STOB, Bannister et al in Australia, Walker, Leo Abse etc in UK law and SGS) è note the net revenue surplus which peaked at $77.7M in 2H14, remained near enough to this at $77.3M in H15 then dropped marginally to $67.3M at 2H15 before then falling heavily to $33M at H16, falling even more dramatically to -$133M at 2H16 before improving (albeit still negatively) to -$43M.6M in H17:
Column 1
Column 2
Column 3
Column 4
Column 5
Column 6
Column 7
Column 8
Column 9
Column 10
Column 11
Column 12
Column 13
0
Item
H14
2H14
H15
2H15
H16
2H16
H17
F14
F15
F16
1
2
· Revenue
178.3
259.9
267.7
330.5
487.5
420.7
322.7
438.2
598.2
908.2
3
· Bad debts
2.2
4.7
2.6
9
29.5
9.8
6.8
6.9
11.6
39.3
4
5
· Adjusted Revenue
176.1
255.2
265.1
321.5
458
410.9
315.9
431.3
586.6
868.9
6
7
Primary cash expenses
8
· Salaries and employee benefit expense
89.7
110.6
121.4
141.9
215.8
200.5
167.1
200.3
263.3
416.3
9
· Cost of sales
0
0
0
16.7
101.2
69.1
48.5
0
16.7
170.3
10
· Rental expense
8
14
13.6
14.2
19.4
18.8
13.5
22
27.8
38.2
11
· Advertising, marketing and new business development
15.7
17.1
18.2
38.1
89.1
47.5
43.9
32.8
56.3
136.6
12
· Administration and office expense
14.6
21.8
20.4
23.8
49.4
43.1
37.1
36.4
44.2
92.5
13
· Consultant fees
1.8
3.1
2.8
3.8
11.7
24.5
11.2
4.9
6.6
36.2
14
· Other expenses
4.4
6.9
8.7
7.2
17.9
16.6
12.6
11.3
15.9
34.5
15
· Finance
3.8
4
2.7
8.5
15.5
23.8
25.6
7.8
11.2
39.3
16
17
· Total Expenses
138
177.5
187.8
254.2
420
543.9
359.5
315.5
442
963.9
18
19
· Revenue surplus
38.1
77.7
77.3
67.3
38
-133
-43.6
115.8
144.6
-95
20
· 3P trend
64.4
74.1
60.9
-9.2
-46.2
55.1
21
· Weighted (20:35:45)
69.6
72.9
56.1
-33.1
-58.6
31.0
SGH Price at posting:
11.3¢ Sentiment: Sell Disclosure: Not Held
