SGH still grossly undervalued at $3

With the acquisition of Quindell's professional services division ("PSD") short-sellers started circling SGH, whose shares were then trading over $8.  Through their search for "dirt," the short-sellers discovered some minor accounting treatment errors in SGH's UK operations (not PSD), which have no material effect on the accounts as the errors in revenue treatment were off-set by the expenditure treatment.

Investors must distinguish that Quindell and PSD (a wholly-owned subsidiary of Quindell) are two separate entities.  SGH bought PSD (not Quindell) with detailed warranties provided by Quindell for PSD's operations - the warranties are secured by a warranty escrow account holding GBP 50M in deposit.

The release of the 2015FY audited accounts vindicates SGH, ie. there are no problems arising from the PSD acquisition.  No auditor would sign off on a set of accounts if they did not represent a "true and fair view" of the state of affairs of the company.

The salient facts of SGH's 2015FY audited accounts are:

1. Group revenue - $627.3M (up over 27%)
2. Cash flow from operations : 73.6% of NPAT ($83.8M) ie. approx $61M
3. Final dividend paid - 5.5c, up 10% or full year 9c, up 12.5%. No company in trouble would pay an increased dividend, if at all.
4. PSD provides a platform for future growth in the UK.
5. Enhanced financial disclosure with early adoption of AASB15 in 2016FY.
6. Group performance (including the UK business) tracking to 2016FY EBITDA target, weighted to 2H; generally, expecting strong growth in 2016FY.
7. Total group fees/revenue (including PSD) target - $1,150M
8. Expecting to maintain capital structure within 30% to 40% gearing range.

ASIC is overdue to report on its investigation of SGH's accounting treatments.  Even the best presented audited accounts by reputable companies can have minor accounting errors if they are put to close scrutiny, bearing in mind that ALL audited accounts are certified by the auditors not as "correct" but as representing a "true and fair view" of the state of affairs of the companies. As such, when the auditors of SGH signed off on its audited accounts for 2015FY and released to ASX, the financial affairs of SGH including PSD are confirmed to be "in order" and reflects a "true and fair view" of the state of its affairs.

To date, the short-sellers are still trying to push down the SGH share price inspite of the above facts, but they are meeting with resistance from investors buying, thus the ex dividend price has moved up recently.  If more investors checked the fundamentals of SGH, they would concur SGH is a buy at $3.  As more shares are bought and locked up, the short-sellers will run out of shares to borrow to short as the price climbs higher.  A turning point will be reached when the short-sellers will have to run for cover and you can imagine what that will do to the share price.  As a matter of principle, no one in his right mind will short a company's shares if it has strong fundamentals, positive net operating cash flow, low gearing, good dividend paying record, a strong growth profile going forward in a growth service industry which is in great demand with no business cycle, and no "uncertainty" over any segment of its operations.  Yet, as at 30 September 2015, the short-sellers short sold approximately 16.5% of outstanding stock.

In order to appreciate how far the short sellers have pushed down SGH's share price, you should consider the following comparison with Link Group's proposed IPO:

	Column 1	Column 2	Column 3
0		Link Group	SGH
1	Price	$5.41- $6.37 indicative	$3.04 (7 Oct 2015 close)
2	Shares issued	359.8M - 373.7M	351.4M
3	Market Cap	$2,021.9M - $2,291.9M indicative	$1,068.3M
4	2015FY profit before tax	$84.5M	$114.5M
5	2015FY profit after tax	$59.2M	$83.8M
6	2015FY revenue	$588.3M	$627.3M
7	2016FY forecast revenue	$750M	$1,150M (including PSD)

Both are in the service industry but SGH has exposure to a wider market than Link, and therefore has better prospects of a stronger growth, especially due to its high brand recognition and a leading player in its legal industry.  From the above comparison, clearly SGH is a screaming buy and should trade in excess of $8 per share, reflecting its pre-PSD acquisition trading price.  Melbourne-based Wilson HTM Investment Group has a 12 month price target for SGH at $7.95.

It is surprising the market does not believe SGH when it announced to the ASX that EY assisted in the due diligence of the PSD acquisition and that the uncertainties surrounding Quindell do not alter its view on PSD and the economic benefits it expects the PSD business will generate.  The market has missed the salient point by allowing the short-sellers to sway it with their insinuations ie. SGH is a highly successful "class action" law firm and is acutely aware of the consequences arising from misleading statements made if they cannot be substantiated.