Happy to run numbers...
For reference - the model is here:
https://hotcopper.com.au/threads/turning-the-ship-around.3351954/#.WVLnhxN94UE
There are some key inputs that feed into it - Revenue and Margin are critical (as what you are really getting with equity is a share in future profits).
Potential future revenue and margins have been done to death on this forum - ranging from the heroic ($800M @ 15%) to current (~$680M @ -28%) - and will likely fall somewhere between these extremes. The capitalisation of interest and additional $40M loan at end of March suggests to me that this half's figures are more likely to be "lukewarm" at best - however the basic business is sound and without the debt burden and some restructuring, I expect them to eventually get back to somewhere around 7-12% margin.
For the sake of this calculation, I have used $700M @ 10% margin. I think this is optimistic in the short term, but achievable longer term. I'm trying to get the best possible outcome for your 50%
@Braintot!
You also need to consider what would be a fair "risk weighting" to apply to "risky" equity vs. "guaranteed" debt. It is very unlikely that someone would value $1 of debt as highly as $1 of equity.
Put simply - for every $100M in debt, the lenders would already be receiving interest @ say 5% = $5M.
So - if they exchange that $100M debt with a guaranteed $5M interest payment for equity, then they are swapping it for $xM in future dividends - which come from Revenue and Margins. Because Revenue and Margins are not guaranteed, a risk weighting will be applied to the debt - so $1 of debt would typically be exchanged for more than $1 of equity.
To arrive at a "fair and reasonable" risk multiple:
Cash funds are delivering 2.5% return and ASX-300 index funds are returning 10.5%, so this suggests a little over 4x risk multiple (at the lowest risk end of the ASX).
Anchorage have a guaranteed 5% interest return and SGH are arguably at the riskiest end of the investment spectrum.
However, let's use the most generous risk weighting of 4x - indicating that SGH has the same risk profile of an ASX-300 index fund.
Based on these assumptions:
Revenue: $700M
Margin: 10%
Risk weight: 4x
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
Column 5 |
| 1 |
|
|
|
Calculation |
Explanation |
| 2 |
Revenue |
A |
700 |
|
projected future revenue |
| 3 |
Margin (%) |
B |
10.0% |
|
Expected margin |
| 4 |
Profit |
C |
70 |
= A x B |
= Revenue x Margin |
| 5 |
|
|
|
|
|
| 6 |
Debt swapped 'M |
D |
250 |
|
How much debt will they swap |
| 7 |
Interest rate on debt |
E |
3.5% |
|
What is the interest rate on the debt |
| 8 |
Interest foregone (M) |
F |
8.75 |
= D x E |
= How much interest they forego |
| 9 |
|
|
|
|
|
| 10 |
Risk weighting |
G |
4 |
|
What multiple should we use to reflect additional risk |
| 11 |
Risk-weighted return (M) |
H |
35 |
= F x G |
Therefore - what they need to make |
| 12 |
|
|
|
|
|
| 13 |
%age equity required |
I |
50.00% |
|
= Risk-weighted return divided by Profit |
| 14 |
Remaining % current shareholders |
J |
50.00% |
= 1 - I |
100% less %equity required to deliver the risk-weighted return |
| 15 |
|
|
|
|
|
| 16 |
Current shares on issue (M) |
K |
375 |
|
|
| 17 |
New shares on issue (M) |
L |
375 |
=(K / J) - K |
How many new shares they need to issue to hit their equity required |
| 18 |
|
|
|
|
|
| 19 |
Issue price |
M |
$0.667 |
= D / L |
= Debt swapped divided into New shares issued |
This suggests that they would be swapping $250M (of the $800M owed) for 50% of the equity - at a D4E valuation of $0.667.
Note: If you use a higher risk weighting, then you end up swapping
less debt - so at a risk weighting of 5x, you only swap $200M of debt @ $0.533.
Personally, I am not convinced that $200M-$250M would put enough of a dent into the $810M debt pile to get SGH back to a solvent footing - those interest payments would still be taking a huge chunk out of cashflow - though it might well suit the debt holders to retain the lion's share of the less risky debt, milk it for a few years and then flick it.
I guess we shall see...
Hope this helps
Steve
