At a very minimum, the Chairman, Skippen will need to go. He is on the record as having backed, justified or confirmed all of the PSD due diligence, etc. Witness, for example, his interview in the August edition of the Company Director. Since then, he has repeated his views a number of times over.
What is now clear is that the situation and circumstances have deteriorated further since the AGM reaffirmation, not improved and that both the H16 and the F16 results will be well wide of the mark.
It is also now very clear that impairments will be booked for H16 and F16, judging by the following comments:
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"Having regard for recent events, including the impact of those events on the Company’s share price, the Company will test its goodwill values for impairment of the UK business at the half year ending 31 December 2015. The impairment review will take into account matters including the risks associated with the proposed changes to the law by the UK Government which may not be enacted either in their current form or at all. If the Company assesses that it is appropriate to impair goodwill related to the UK business, any impairment will not impact cash flow from operations but will impact statutory profit."
The resulting impact on statutory profit will then flow through to equity, as it sits on the Balance Sheet. This then will impact against the Company's own stated gearing range of 30 - 40% by F16. At F15 it was 43.4%. In several recent posts, I had argued that this may well have ballooned to above 47%. Now, it's likely to be above 50% given the following added observation:
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"The Company’s financiers have been kept informed of its position at all times. Slater and Gordon has more than A$100 million headroom within its banking facilities and this headroom is expected to increase as the financial year progresses."
The headroom in the banking facilities has reduced significantly from 30 June, down from $175m to "more than A$100 million".
With no mention of the cash balances, it is likely that SGH has eaten up much of that balance as well as drawn down further on its banking facilities resulting in a switch in cash terms of $100m+ (ie: facilities up by +$75m, cash down by at least $25m, if not more).
If so, then this would put current gearing at closer to 51% before any impairments have even been considered.
But even if we accept that the cash is still there, but the borrowings are up by at least $75m, then that alone will have taken current gearing to 49%.
The Chairman (at the very least) must now be hanging by a thread.
The other concern however is with whoever these "independent advisers" are, judging by the following comment:
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"Commencement of a review of the Company’s approach to financial forecasting by new Group Chief Financial Officer Bryce Houghton and independent advisors appointed by the Board, has resulted in 2016 financial year guidance being reconsidered."
This is now starting to look increasingly like a cashflow problem as cash is not coming in as fast as they need it to, whilst cash is exiting at its regular recurrent rate. NIHL is also clearly acting as a significant cash drag on the business whilst something else also happened in the UK during November which all but stalled the business. Witness the following comment:
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"lower than expected trading results in segments of the business in the UK in November ...".
There are now serious headwinds forming at the cape, with impairments now also well and truly on the radar (as often occurs whenever a new CFO or CEO is appointed):
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"Having regard for recent events, including the impact of those events on the Company’s share price, the Company will test its goodwill values for impairment of the UK business at the half year ending 31 December 2015. The impairment review will take into account matters including the risks associated with the proposed changes to the law by the UK Government which may not be enacted either in their current form or at all. If the Company assesses that it is appropriate to impair goodwill related to the UK business, any impairment will not impact cash flow from operations but will impact statutory profit."
The following statement however suggests that the operating cashflow impact will now be far greater than the $40m negative impact advised at the AGM, as the following suggests:
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"Whilst the Company expects that the UK business will make a positive contribution to gross operating cash flow in December, cash timing differences and a poorer than expected case resolution profile will impact negatively on the gross operating cash flow result for the 6 months ending 31 December 2015. An update on the impact on the gross operating cash flow result for that period will be provided in January 2016."
At the AGM (<1 month ago) the following was said by Grech:
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"Given the slower than expected start to the year in the UK business and the risk that we may not be able to recover the lost ground by 31 December there is now a likelihood that Group operating cash flow will be negative in the range of A$30-40 million in the first half, with a strong recovery expected in the second half."
The comments of today therefore suggest a significant, further deterioration on that earlier reported figure which coupled by the reduction in available banking facilities to $100m (ie: increased drawdowns of $75m since July) suggests negative operating cashflow of at least the AGM guidance rate, if not upwards of double that (ie: if it took negative guidance of $40-40m in order for an announcement to be made, its very likely that further guidance would be similarly based). So, a very significant deterioration in events and circumstances since the AGM of <1 month ago.
Not good, going into the Christmas break and the January slowdown.
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