A lot of negative commentary out there (and rightly so).
Plenty of dark clouds and the future is definitely murky.
So what are the remaining positives?
1. Australian business fundamentally sound
Yes, the UK is a disaster. However, EBITDAW for Australia for the first half was $16.4 million which is up 15% from last year.
Revenue was also up 22.7%. This result also included a one-off cost of $3 million spent responding to ASIC and implementing the new accounting standard. S+G remains a market leader in Australia.
2. New Conservative Revenue recognition
Arguably more realistic, but definitely more conservative, AASB15 has resulted in a lowering of WIP.
S+G operate in a 'no-win, no fee' environment that in my view means this new standard would impact them far more than a typical law firm.
However, adopting this new standard does not mean that certain WIP is not recoverable, it just means that it is not recognised as such until certain criteria have been met (presumably after actually getting paid after winning). This means the WIP value potentially looks worse than it actually is.
3. Writedowns take into account future legislation
UK regulatory reforms are imminent and impact S+G now.
Wait? No, they don't.
At best, these reforms are 18 months away and could be subject to change.
Meanwhile, cases are rushing through the door before the potential limitations kick in.
Assuming this legislation passes, S+G would have well and truly reformed its business model to limit any impact.
If this legislation is watered down or doesn't pass, it is all upside.
Final thoughts
Best case scenario for S+G is that the banks agree on the new business plan next month.
However, even if they do, I foresee a capital raising (although hopefully after the share price recovers a bit).
If S+G survive the next few months, there will be a long journey back.
AG and Skippen should both go after the unmitigated UK disaster, but only after they fix their own financing mess with the banks.
Not a great time for LT holders or staff caused solely by senior management.
SGH Price at posting:
43.0¢ Sentiment: Hold Disclosure: Held
