Lesson Learnt

Undeniable, overall, shortist has the big winner for predicting the share price collapse. As a longist, I have to agree that I am pretty disappointed with the 1H result. Many shortist is coming up saying, “I told you so….”. I am just trying to put together what did the longist get it right and what did we get it wrong!
The things longist is right in the prediction:

• Asic review – shortist claimed that there will be more than one roaches in the kitchen, which end up the longist is right that Asic now has discontinued their investigation;
• Revenue – I am not sure about other longist, but the revenue is clearly within my expectation.
• CR – longist has got it right as well that there is no CR.

The things which is outside the longist prediction:

• Maybe some shortist has already predicted about the net debt, but I have never thought the net debt will be that much based on the revenue which is inline with my prediction. It is clear that the SGH management has screwed up and blowed up their opex, but this is no way we will know before the announcement. For instance, SGL UK (not new acquisition), the revenue is clearly better than 1H 2014, however, the ebitaw has turned from positive in 1H 2014 to negative in 2015. Even up until now, no one is able to provide justification about it.

Fair Value:
I won’t put a fair value for SGH at the moment, the company might not even exist one day. Now it will be the playground of the traders until announcement from the bank of continue support or pulling the plug.
Any hope on SGH:
With SGH carried out reorganisation and restructure review, DD will be performed by independent auditor (FTI and MGN) and further approval of the bank syndicate will be required. SGH will be pronounced death if the bank syndicate is pulling the plug, however, if the bank chose to continue to support them, there is high chance that they will survive, else with more than $300M debt, Westpac will be dragged down by SGH as well.
I don’t think it is a good time to get rid of AG at the moment, although he screwed up, he is the only one who has the overall picture of the organization at the moment and SGH is clearly running out of time and SGH has only ONE chance to make things correct. I don’t think anyone should put high hope that they will turn the boat around, but yet there is still some hope. The revenue still look decent to me, as long as they can do the right job cut with minimal impact on revenue, they bank will of course support them and they will be fine. I would say there is more than 50% chance of the bank will continue to support them, this is not a random percentage plug from the sky, the additional provision by Westpac is a clear indicator, else the bank wouldn’t have dump extra money to the company. In addition, SGH at current condition doesn’t have much power, even if what they proposed is rejected by the bank, they will just have to follow what the bank wants them to do.
In addition, teething problem would have gone in 2H. Also, they still have $600M of WIP at the moment using the new accounting system which is approximately 15%-20% more conservative than the previous accounting system (refer to their presentation slide). Not forgetting that with the disappointing NIHL, we will definitely be getting something out of the Escrow.