A quick followup to my original post on SFH, after today’s...

A quick followup to my original post on SFH, after today’s results.

One thing I didn’t quite appreciate from the preliminary report released on Feb 9th (even though, looking back, it was actually there in plain sight) is that, after the repayment of bank borrowings that occurred during the DH2017 half, the Company has now a significant working capital deficit.

Using as a definition [Working Capital] = [Current Assets] – [Current Liabilities], we have the following WC trajectory:

Working Capital

DH2017: -20.45m$
JH2017: +2.57m$
DH2016: +3.87m$
JH2016: +2.60m$
DH2015: -1.09m$
JH2015: +14.99m$

What I personally find concerning about it is that the existing bank loan facility, which was renegotiated in December 2017, is going to reduce from its current 40.00m$ to 22.00m$ by Jun 30th 2018 (see page 15 of today's release). Since the amount drawn at Dec 31st 2017 was 7.63m$, that leaves only 14.37m$ available post Jun 30th 2018, which is not enough to cover the 20.45m$ deficit.

On the other hand, I see it as unlikely that the Company will be able to cover the shortfall out of Free Cash Flow, given that 1) The June half is seasonally weak, with a current underlying EBITDA guidance of around zero, and 2) The cost reduction programme, which has yet to start in earnest, will entail exit costs in the order of several million dollars for the closing down of underperforming shops over the next twelve months.

That being the case, and because the stronger Christmas season occurs only at the end of the DH2018 half year, I now see a distinct chance of additional funding being needed between now and Dec 2018. So, either the Company can secure new credit facilities in the mean time, or fresh equity capital will be required.

That contradicts my original investment thesis, according to which SFH should be able to carry out their cost reduction programme through June 2018 without the need for a capital injection.

In this regard, I also noticed that the existing bank loan was originally scheduled to amortise down to 35m$ by June 30th 2018 (see page 80 of the 2017 AR), as opposed to 22m$ as per today’s report. The acceleration in the amortisation schedule, which must have come as part of the bank debt renegotiation occurred during DH2017, makes me think that the early repayment of bank borrowings was likely forced upon the Company and not a matter of choice.

All things considered, I have therefore decided to exit my (small) position for the time being, and will reassess the opportunity to buy back in if and when more evidence of a turnaround unfolds.

This is all IMHO only, please DYOR & GLTAH.