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54.5¢ slater & gordon limited

Frabjous Friday : 50 not out !, page-42

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Melrosian

2,018 Posts.

20/08/16

05:12

Post #: 18563607
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Originally posted by walkingeagle ↑

Just_a_guy - I seem to remember being surprised to see the then bank facility maxing out at the end of March when new terms were agreed (perhaps suggesting money had been spent closing down loss-making UK activities/branches - one assumes provision had been made in the H1 P&L?). If that was correct, operating cash flow in the first 3 months of H2 will still have been negative, but I guess the underlying reasons will be reported and adjusted before reporting 'normalised' numbers. Just surmising. Whatever, cash flow in the final quarter surely has to be positive to generate confidence that management has finally got a hold on the UK business and it's starting to perform in line - and impact favourably on SGH's SP. I didn't try to work out the future effect on cash flow of all the provisions/write-offs made - the information to do so wasn't really available, but will all have been taken into account when the new facilities were agreed and these didn't show an overall increase.

This is one of those cases where the past (which is largely what the share price has been punished for - spending money on QPP's professional services division (PSD) which the market is still saying was largely wasted) matters not a jot when it comes to working out a fair price for the shares - when such big write-offs and provisions have been made and more than reflected in the SP. All that matters is what is happening now and what's likely to happen in the foreseeable future - particularly with cash, which in this case shouldn't be too far from reported profit given the new criteria set by the accounting authorities when it comes to reporting profit, with WIP carrying value now having to be 'all but certain' of being recovered via billed fees.

So I'll mainly be concentrating on cash flow performance in Q4 2016 rather than anything else. This is not to say the market will view things the same way. Our respective objectives aren't necessarily aligned, particularly as to timescale. If SGH reports decent numbers for Q4 (eg H2 as a whole being profitable and cash generative, when we know Q3 was cash flow negative) - and the outlook given by BH and AG is positive, but the shares don't fly (there will probably be forces in play that are determined that they won't) then it will be a good time imo to consider increasing one's holding.

These are only my personal views and certainly don't constitute advice. Please DYOR. Everything I can see points towards SGH being a good recovery play after being decimated by shorting. My reading is that management handled the acquisition badly and failed to understand and act on the difficulties integration of two very different businesses presented, at least from a cultural and operational perspective. Expecting two AU execs with a good history within SGH Au to move to the UK and put SGH's 'stamp' on PSD (now called SGS) almost overnight was blinkered. The fact AG spent a few months in the UK (hopefully personally getting fully to grips with what was needed) is a positive imv. I doubt he enjoyed the humiliating mauling he took - he comes across as being a proud individual and has a lot more reason than most of us (not least financially) for wanting the company to succeed.

Let's hope betwen them all they've got the situation buttoned down. The WIP won't have gone anywhere and they still seem to be taking business in. They just didn't get it billed.

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Walkingeagle

Q3 might have been cash flow negative, but it is also possible that full drawdown could enable cash to be stuck up jumper or somewhere. However your review of sitrep is spot on.

Mel

SGH Price at posting: 50.0¢ Sentiment: Buy Disclosure: Held
4 Upvote

0 Great analysis

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