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54.5¢ slater & gordon limited

Potential Voluntary Administration, page-197

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djwillis

1,031 Posts.

111

24/12/16

17:04

Post #: 21551741
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Originally posted by Dr.Who ↑

dj, spot on.

In theory, though not practically, S&G could have net assets of say just $80m and be very profitable making shareholders very wealthy from dividends alone

* let's say all cases/services taken on are successful and they settle within a week
* debtors pay the moment a bill arrives
* let's say all creditors are paid the instant their bills arrive
* all employees are paid on time
* $80m working capital to cover timing of inflows outflows week to week
* W/C consists of $30m PPE and $50m cash (variance +-$20m as year progresses)
* no debt
* no investment in growth just a cash cow mature sustainable business
* revenue $900m
* NPAT at 14% margin
* $126m bottom line profit
* let's say $20m of that profit goes to top up W/C to maintain $80m
* $106m distributed to equity holders - and the cycle continues next year

Balance sheet
Assets $80m
Liabilities $0m

Equity $80m (less than today) yet the above hypothetical would be paying a 30c dividend! Moral is, cannot look at equity in isolation, it needs to be considered relative to the type of business and its unique situation.

Obviously the above is unrealistic but technically correct. The point being a services company's primary assets are its people and they don't show up on a balance sheet. Actually they do to a degree and that is in goodwill. When buy a services company it is not the work in progress forming a value proposition it is the opening of future opportunities and that is accounted as intangibles - if grew organically there would be no balance sheet reflection of value. To say intangibles should not be counted in a services company is ludicrous.

One of the many 'shake head' moments in finance is when read/hear novices misquote industry gurus. I'm 100% certain genuine gurus of finance have their golden rules but are wise enough to adjust those depending on specifics of each industry/company within that industry. They don't confuse the masses by explaining that, they just leave it to others to deduce it.

When I read of quoting Buffet investing style it makes me smile. I can outperform Buffet most years, no doubt. That doesn't make me 1/1000 as knowledgeable or skillful as Buffet, it just reflects liquidity. Buffet himself is quoted as saying if he only had $100m capital to manage he could earn xx% CAGR. (can't recall exactly the number 80% pa springs to mind). The point is his investing rules are appropriate for someone managing $bn+ of capital, and therefore cannot easily move in and out of investments. Buffet's rules (or most other high-capital value investors) are not appropriate for a small time retail managing $200k of capital - those rules may help marginally beat the market by say 1 or 2 % but that is about it. On the flip side there is probably sensible advice in their preachings if extremely risk averse and happy with just 6-8% CAGR.

I say all that because quoting multiples of book, net-net assets, discounting for intangibles, ROE, etc. etc. etc. is irrelevant to the small end of town with unique sets of circumstances.

No, I don't believe a serious high-capital value investor would be interested in S&G today but that is not to say never (not Buffet of course, even if its balance sheet was corrected it is far to small). That is what creates the opportunity for a small time nimble investor that understands the business and its risk and is not put off by the clearly horrible current metrics.

Go for mediocre returns by following the bible written by gurus or throw the bible away and make your own educated rules that open potential for exceptional returns but also real risk of failure. We makes our choices but being lulled into following to the letter preachings of gurus is not always the wise choice.

If not invested today in S&G, I would be standing aside but I would be keeping a keen eye on developments with a view to potentially getting in early.

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The Doc clearly has an active imagination. If you can't see the possibilities silvahman you are left with "...mediocre returns by following the bible written by gurus..."

SGH Price at posting: 23.0¢ Sentiment: Buy Disclosure: Held
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