I have a finance and consulting background, but that's not important. I have done enough research on this company to finally make a relatively informed decision. May I ask what is your background? I am actually a professional by the way. My job is to manage money for myself and others.
I will make a very obvious observation to debunk what you are claiming.
Hottuna: "That's quite a divergence - I imagine that if VGI's thesis was true, they probably needed a big acquisition and cap raise to manage the gap!"
Did you understand what you just said? Those "free cashflow" is operating cashflow plus acquisitions cumulative from 2007-2014. If they made a big acquisition, then this gap will be bigger. In fact, this gap is already huge now now due to the 1.2billion dollar acquisition of Quindell's PSD(SGS). The 2H 2015 number will be minus 1.4bil free cash flow.
If your definition of "manage this gap" means to drag it out even bigger by 1.2bil, then I have nothing to say. But let's not dwell on a minor error of your understanding and move on to the error of the actual graph you used to support the argument.
Oh, before I move on, let me say that I was going to address your other point on the long standing board and CEO, but I realised you had no point there, since your whole premise was based on that divergence graph, how the CEO must be cheating due to that graph. Otherwise Berkshire has a chairman in Warren Buffett for 50 years and it's still fine.
I will now address the graph you had on the divergence of cashflow from net profit. Firstly, I would like to point out the graph has errors in my opinion. I cannot match the free cashflow numbers on that image with Slater's annual report. If you can please provide proof using Slater's annual report from 2007 onwards cumulative. Of course I can be wrong due to carelessness, but the onus is on you to prove to me, since I actually checked already. I also emailed the author about this issue, no replies of yet. Here is my proof, all using Slater's numbers taken from their annual report since 2007. Look at the cumulative total for 2007-2014, it's -159 according to what I can find, and not -242 in the graph.
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
Column 5 |
Column 6 |
Column 7 |
Column 8 |
Column 9 |
Column 10 |
Column 11 |
| 1 |
SLATER |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
|
2007-2014 |
| 2 |
Free Cash Flow |
4 |
-3 |
-11 |
9 |
-46 |
-55 |
14 |
-71 |
|
-159 |
Of course that is not a big discrepancy and should not be used to end the argument. So let me start my real argument.
Slater invested 322mil from 2007-2014 in Capex to mostly acquire other businesses. That's a huge amount. If you remove this, net cashflow was actually 322 - 159 = 163mil positive over that period.
Net profit was 218mil over that period. So the real discrepancy is 218mil - 163mil = 55mil. Most businesses with cost first and revenue second, like Slater, suffer from cashflow that is less than net profit due to accrues and growth.
Now of course you can make the argument that those cashflow is not real, and it was due to "roll up". This, again, is a weak argument. Warning, it gets a bit complicated so you can stop reading if you can't be bothered to understand my argument. But please don't make personal attacks on how I have no qualifications to make such arguments.
I will give you some data to prove my point. Slater's cash receipt in 2007 was 55mil, while it's cash receipt in 2014 was 442mil. Total cash receipt was 1447mil from that period. If Slater did not grow and just averaged 55mil a year like 2007, then it's total cash receipt should be 440mil for 2007-2014. Therefore the extra 1447mil - 440mil = 1007mil must have come from "roll up" through acquisition according to the shorters like yourself, if you assume Slater had no real business growth.
By definition a roll up is only bad when it buys revenue at an inflated price to boost current earnings. For example, you paid 100mil for a 80mil of future cash stream to boost your figures in order to make your results look good in the next few years. That would be pretty bad. However, Slater gained 1007mil of cumulative cashflow with an outlay of just 322mil investment. Those cashflow is still on going, 2014 it was 442mil, which is significantly higher than the original 55mil cash receipts. Those 322mil paid must have been money well spent wouldn't you say?
I can post all my excel tables and source documents, but I don't think anyone would want to read it. Even this post is too long and too boring for most I think.
