Items like deferred lease incentive, stepped lease liabilities...

Items like deferred lease incentive, stepped lease liabilities are non cash

@natnicnak

Are you definitely sure about this one? From reading UIG Interpretation 115 (see link below) it would appear to me that these provisions do actually impact the conversion of EBITDA to Cash Flow.

http://www.aasb.gov.au/admin/file/content105/c9/int115_07-04.pdf

If you look at Example 1 (page 9 in the link), for instance, the lessee receives a 1,000$ upfront incentive which is then amortised over a 10-year period. My understanding is that the reported rent (contributing to the EBITDA calculation) would then be 1,900$ pa, against an actual cash outlay (contributing to the Cash Flow statement) of 2,000$ pa; the Company would then have to book a provision of 100$ under Current Liabilities and one of 900$ under Non-Current Liabilities, with the former corresponding to an actual need on cash in year 1, correct? The same reasoning applies to stepped lease liabilities.

And leave (LSL owing to employees with greater than 7 years service for example classified as current) along with other related entitlements, whilst current under 101 given not legally entitled to defer under 69(d) , the timing of actual cash outlays is another thing.

So, you’re basically saying that Employee Benefits under Current Liabilities correspond to “unconditional” legal entitlements (as per AAS30.35(a)), while those under Non-Current Liabilities correspond to “pre-conditional” entitlements (as per AAS30.35(c)), irrespective of their actual likely timing, is that right?

This is actually a very valid point (so I’ll be oblivious of your subsequent condescending comment), as it conceptually makes complete sense. So, under the best case scenario where no Employee Benefits are actually cashed out in year 1, Current Liabilities might be overstated to the tune of 16m$ (looking at the Provisions breakdown in the 2017AR); that would be (just) enough to cover the expected shortfall between WC and UCL at Jun 30th 2018, as previously calculated.

All other items (such as income tax payable, deferred revenue, mark-to-market of derivatives, etc.) look definitely “cash” to me, so I’d count them as genuine Current Liabilities.

Regarding your mention of Moody’s, I actually don’t see how the comparison is relevant at all, given that Moody’s has consistently displayed both 1) a Working Capital surplus, and 2) a strong Free Cash Flow generation over the years. I guess the point you wanted to highlight was that Moody’s could afford to run a negative Net Asset position, but that is no problem for a capital-light business (such as a rating agency) as long as the serviceability of long-term debt is supported by a strong Free Cash Flow generation.

Finally, regarding the impact of shop closures on the profitability of SFH: absolutely, if you look back to the beginning of this thread, that was my whole point in outlining the investment case for this company. And, once revenues stabilise, it was also my assessment that Fair Value would have to be in the region of 5.5x EBITDA (or better).

The only hurdle, between now and then, is the risk of being forced to issue new equity at very dilutive levels. The possible overstatement of Current Liabilities vis-à-vis the actual need on cash, which you have helpfully highlighted, does make the situation look somewhat better than I initially thought it could be, but it still looks pretty tight to me.

And, while the amount of interest from external counterparties is reassuring, I suspect it is not SFH having the upper hand in the negotiations, so I wouldn’t give it for granted that a possible deal with one of these suitors would be value-accretive from the perspective of an existing SFH shareholder.

Anyway, I think I (and hopefully everyone else on this thread, however many they are) have now got a somewhat clearer view of where SFH presently stands, so your technical insights on the matter are definitely appreciated.

Cheers