Dilution at this price, page-17

Discodave

I think you are not far off the mark

I think the shareholders of SGH find themselves in a pit because of a lack of common sense and advice from the company's corporate finance advisors. I am afraid the directors have to share the blame. There can be no blame for a new SSAP which brought cash accounting closer. I think the new SSAP rules are not consistent with normal business thinking in a world of accruals. - but SGH has already taken the hit .

I have been disagreeing with Mike ( on WTG Board and HC SGH) for the last 18 months or so. There is one element we agree upon. SGS ( formerly WTG's professional services division) is a new business model. It is disruptive and in my view it is coherent , ticks all the boxes for a management accountant , and is likely to emerge as a dominant force in its market. It will save time and money all round. It is likely to succeed as time works its magic. In my view SGH is a turnaround at the bottom of its U curve with good recovery propects. ( If WTG , which had borrowings pre PSD sale of 1.5 month's of invoicing, had dug in it would now too have been at a low ebb , but with good earnings from PSD and much much lower easily afordable debt.)

The mistake SGH made was to overgear ( in my view by £75m or A$125M) and fail to identify and source sufficient equity backing ( probably in the UK) . Had it sourced that equity and taken more dilution then, the current picture would have been altogether different. It might also have been prudent to do a deal with the law society and distribute most NIHL cases to its competitors. Had it done so the current indebtedness would have been A$ 50 m less. It was obvious 18 months ago that the cash from NIHL cases would not arrive until 2017. If SGH has to endure dilution in the next year, it is fairly obvious that
it could have been avoided if the corporate financiers had structured the deal with less debt in the first place. It is also probable that we would have had continuing guidance and be looking forward to a divy from 2017 profits.

My guess and hope is that the cash situation will have improved by $30-40M at 31/12/16, but that the circling vultures will prevent SGH directors ensuring we have good guidance for 2017. We may hope/guess for $200M cash +ve from NIHL in 2017
but uncertainty will reduce if the directors can give strong hint at $100M cash from NIHL in 2017 . Then $500M debt this time next year would look very possible.

I shall be looking for very much stronger performance figures from SGS. I shall be very disappointed if it isnt there. Prospect of $500M debt and poor ROCE would point to a painful long haul and hard dilution

I hope SGH starts to ditch some of its smaller least profitable offices in the UK provinces. The same may be true in OZ.

I am in for 2017 . If I have read the runes correctly, SGH will be a star in my portfolio. I am not expecting spectacular indebtedness improvement at 31/12 17. I do hope for clues / fruit / for 2017.

February should be interesting

Mel ( sometimes wrong but hopeful)