Taking a bite at SFH, page-23

Management have already stated that the reduction in bank debt will be funded through improved inventory management and creditor terms. That's what shows in the half-year accounts, so there will be no funding deficit going forward unless you expect WC to increase again in comparison with PCP.

@Djingo

As discussed earlier in this thread, my expectation for Working Capital as of Jun 30th 2018 is roughly as follows (before any further symmetric reduction in Inventory and Payables):

Current Assets
Cash: nil
Receivables: 11.3m$
Inventory: 81.9m$
Total Current Assets: 93.2m$
Current Liabilities
Payables: 84.5m$ (=103.7m$-27.7m$+8.5m$)
Provisions: 21.3m$
Other: 16.4m$
Total Current Liabilities: 122.2m$
Net Working Capital: -29.0m$

That will be against an undrawn credit line of 14.4m$; therefore, whether the Company is able to fund its WC position in the Dec 2018 half will depend crucially on:

1) To what extent reported Current Liabilities will correspond to actual calls on cash (see discussion above)
2) How much Free Cash Flow the Company can generate in early FY2019 as a consequence of the ongoing closure of unprofitable shops (and factoring in ongoing Capex needs)

Several other factors could further improve the cash flow position:
- Closure of unprofitable stores reduces drag on profits and releases about $80k inventory per store
- Improved trading performance increases profits
- Renegotiation of leases further improves profits (reports that management is targeting 25% reduction)

Sure, the upside scenario is clear.

In summary, the business performance would have to deteriorate further in order for there to be a funding deficit whereas indicators are pointing the opposite direction.

It all depends on what you mean by “deteriorate further”: if the WC deficit is in the region of -29.0m$ as of Jun 2018, an underlying HY2019 EBITDA merely matching the 18.5m$ reported in HY2018 would not leave the Company in a great place, I don’t think.

So, it is all a function of how much positive FCF SFH can generate (after restructuring costs and Capex) in the December half of 2018; and that, again, depends crucially on how successful the downsizing programme is. If successful, I would personally view it as a marked improvement, rather than just a lack of deterioration.