OK - I ran three scenarios here:
https://hotcopper.com.au/posts/23951217/single
An optimistic one that came out at $0.62/share. A more (imo) realistic one that came out at $0.058/share and a pessimistic one that came out at basically nothing per share - suggesting D4E would be done at a token amount (say $0.01/share).
Sorry if this was hard to follow.
OK ... again - all of the calculations and assumptions are on public display here:
https://hotcopper.com.au/posts/23951217/single
I am not hiding anything in those numbers and I tried very hard to explain my thinking as I went through.
Please feel free (anyone) - to challenge any of the assumptions or figures used.
I know there is a lot of facts and figures in there, so I will try to simplify the 93% dilution scenario for you:
Anchorage are owed $810M.
They will earn $40M p.a. in interest if they convert NONE of their debt.
In the "what if" scenario we are exploring here - if Anchorage convert say $300M of their debt, they are GIVING UP $15M p.a. in GUARANTEED interest payments - and sacrificing a top-ranked debt-holder position with a bottom-ranked equity position.
To give up $15M in GUARANTEED interest payments (and $300M in future principal repayment), Anchorage will want to receive an appropriate INCREASED return to compensate for the additional risk they have taken on.
This is just the same as when you take your money out of the bank earning you 1-2% return and invest in the ASX in the hope of receiving a 10% return - more risk - more reward.
What would be an appropriate amount of INCREASED RETURN Anchorage might look for to compensate for this extra risk. I suggest that 5x is a conservative multiple.
So - in exchange for $15M in guaranteed interest, Anchorage are looking for a likelihood of $75M in return on equity.
Now we turn to the business profit.
At $800M revenue and 10% margin (as calculated by Grant here:
https://hotcopper.com.au/posts/23916264/single) - the business produces $80M in profit.
To deliver Anchorage $75M of that $80M return, they would need to OWN 75/80 = 93.75% of the equity in the company - leaving 6.25% for current shareholders.
To turn that into number of shared, simply divide current shares on issue (375M) by the 6.25% owned by other shareholders - and you get 6Bn shares or an additional 5.625B shares. (Oh look - a mistake in my earlier calculation - I initially used 6.75% remaining for current owners).
To calculate what D4E is done at, you then divide $300M debt into 5.625B shares which gives you a figure of $0.053 per share.
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
Column 5 |
| 1 |
|
|
|
Calculation |
Explanation |
| 2 |
Revenue |
A |
800 |
|
projected future revenue |
| 3 |
Margin (%) |
B |
10% |
|
Expected margin |
| 4 |
Profit |
C |
80 |
= A x B |
= Revenue x Margin |
| 5 |
|
|
|
|
|
| 6 |
Debt swapped 'M |
D |
300 |
|
How much debt will they swap |
| 7 |
Interest rate on debt |
E |
5% |
|
What is the interest rate on the debt |
| 8 |
Interest foregone (M) |
F |
15 |
= D x E |
= How much interest they forego |
| 9 |
|
|
|
|
|
| 10 |
Risk weighting |
G |
5 |
|
What multiple should we use to reflect additional risk |
| 11 |
Risk-weighted return (M) |
H |
75 |
= F x G |
Therefore - what they need to make |
| 12 |
|
|
|
|
|
| 13 |
%age equity required |
I |
93.75% |
|
= Risk-weighted return divided by Profit |
| 14 |
Remaining % current shareholders |
J |
6.25% |
= 1 - I |
100% less %equity required to deliver the risk-weighted return |
| 15 |
|
|
|
|
|
| 16 |
Current shares on issue (M) |
K |
375 |
|
|
| 17 |
New shares on issue (M) |
L |
5625 |
=(K / J) - K |
How many new shares they need to issue to hit their equity required |
| 18 |
|
|
|
|
|
| 19 |
Issue price |
M |
$0.053 |
= D / L |
= Debt swapped divided into New shares issued |
Now - just for interest, let's plug in your more heroic assumptions of 15% margin.
To avoid any confusion, we are now talking about a separate, second "what if" scenario here.
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
Column 5 |
| 1 |
|
|
|
Calculation |
Explanation |
| 2 |
Revenue |
A |
800 |
|
projected future revenue |
| 3 |
Margin (%) |
B |
15% |
|
Expected margin |
| 4 |
Profit |
C |
120 |
= A x B |
= Revenue x Margin |
| 5 |
|
|
|
|
|
| 6 |
Debt swapped 'M |
D |
300 |
|
How much debt will they swap |
| 7 |
Interest rate on debt |
E |
5% |
|
What is the interest rate on the debt |
| 8 |
Interest foregone (M) |
F |
15 |
= D x E |
= How much interest they forego |
| 9 |
|
|
|
|
|
| 10 |
Risk weighting |
G |
5 |
|
What multiple should we use to reflect additional risk |
| 11 |
Risk-weighted return (M) |
H |
75 |
= F x G |
Therefore - what they need to make |
| 12 |
|
|
|
|
|
| 13 |
%age equity required |
I |
62.50% |
|
= Risk-weighted return divided by Profit |
| 14 |
Remaining % current shareholders |
J |
37.50% |
= 1 - I |
100% less %equity required to deliver the risk-weighted return |
| 15 |
|
|
|
|
|
| 16 |
Current shares on issue (M) |
K |
375 |
|
|
| 17 |
New shares on issue (M) |
L |
625 |
=(K / J) - K |
How many new shares they need to issue to hit their equity required |
| 18 |
|
|
|
|
|
| 19 |
Issue price |
M |
$0.480 |
= D / L |
= Debt swapped divided into New shares issued
|
In this second scenario, dilution is only 62.5% and D4E is done at $0.48.
And before you go quoting $0.48 as MY estimate
- this is just another calculation based on your heroic assumptions for margin. It is VERY important when considering this scenario to acknowledge that SGH cannot actually ACHIEVE this margin based on their current published financials. In other words - this will NOT be the basis on which Anchorage would work their calculations.
Per the calculation above - the POST-DILUTION share price would be $0.48 based on even your most heroic assumptions assuming $300M debt swapped for equity. If they swap less debt, you can get the share price higher - but you would be leaving your interest payments perilously high - probably at an unviable level. If Anchorage accept a far lower risk-weighted return in exchange for equity, then the share price is higher - again you would have to ask yourself why they would accept this.
And again - every time you suggest that the $3 figure is in any way supported by
me, I will post the following important disclaimer for anyone else reading:
All I did was run a calculation based on your made up numbers.
I DO NOT endorse the $3 SP figure - it is a "la la land" number based on assumptions that the company demonstrably does not and cannot meet.
Surely the discrepancy between your $3/share figure and the current share price ALONE tells you that it cannot possibly be accurate and that there MUST be something wrong with your assumptions...?
Cool. This might help for anyone who is a bit of an Excel buff - I have provided the calculations behind my spreadsheet in the above tables.
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
| 1 |
Calculation |
|
|
|
| 2 |
Revenue |
A |
800 |
|
| 3 |
Margin (%) |
B |
15% |
|
| 4 |
Profit |
C |
120 |
= A x B |
| 5 |
Debt swapped 'M |
D |
300 |
|
| 6 |
Interest rate on debt |
E |
5% |
|
| 7 |
Interest foregone (M) |
F |
15 |
= D x E |
| 8 |
Risk weighting |
G |
3 |
|
| 9 |
Risk-weighted return (M) |
H |
45 |
= F x G |
| 10 |
%age equity required |
I |
37.50% |
|
| 11 |
Remaining % current shareholders |
J |
62.50% |
= 1 - I |
| 12 |
Current shares on issue (M) |
K |
375 |
|
| 13 |
New shares on issue (M) |
L |
225 |
=(K / J) - K |
| 14 |
Issue price |
M |
$1.333 |
= D / L |
Cheers everyone happy Saturday
