One little factor in your outcome scenario is that the share register has a high% of SGH employees on it and I can only assume
equity has been used for bonuses. In a long term future it would not help if those working holders have "we wuz done" at the back of their minds.
It is VERY clear and obvious that case throughput reduction ensures net cash is derived from WIP ( which as we know ...if it isnt near fee stage, was now been given zero asset value) ... NIHL is in that category and in the next 12 months cases will have tuned to cash or be jolly near fee stage and will have WIP asset value. If there is a bit of case reduction across the group, and NIHL does not have 300 people working for no success, it is perfectly reasonable to expect $350 positive cash flow ( minus $50 for WTG profit share) SGH with leverage reduced to $450M would look very different.
It is also true that if the banks have it in mind to take SGH down, they might delay until the day before large cheque written for WTG.
If Wilson research is correct and there is a 20 % cash milking reduction of new cases to be processed in future , then I dont get why there was a $90M spend on advertising in the first half. Seems overdone . Certainly AG's 25% awareness in my part of N Britain hasnt worked. Hardly anyone here has heard of the group. ???
That said , if there is the "Wilson research" reduction , it still allows SGH to log supernormal gross margins for WIP ( currently valued at zilch) which get to fee stage. So in the short term the likelihood is that SGH will show sharply rising profitability. ( Mike and Alex getting Abacus out) So what profit in the next 12 months? My sums suggest Profits after tax nearer $300M than $200M but a number of things could make me wrong on that. My hope however is that a good % of NIHL cases are brought to near fee stage by 30 Jun 16 and that ensures that a lump of that which has been written off ( the $30M spend on NIHL to Dec 15) is then immediateley written back, and the same applies to WIP in the rest of the group which gets to near fee stage. It is impossible to say how much of written down WIP will get to fee, or near fee, stage in the period to June 16 but it will be large and material in context. The Profit figs for 6 months to June 16 can be expected to be in Woosh category because the WIP write downs at 31 12 15 have LOADED THE CATAPULT in SGH favour. ( If Mike cant see/admit that --- very naughty chair and back to year one accountancy classes).
Repeat prescription in H1 2016/17! NICE! [ debt below $500M Dec 16 - don't know but could be]
That said , SGH cant go on milking WIP after 20% case reduction and shrinkage of 20% would have a negative effect on profitability thereafter. It will need to keep reducing debt and will need to get cracking on new business and has to find capital for WIP. So not out of woods. I am a dutchman ( Or NIHL is burnt toast) if the next 2 reporting periods do not
materially improve the commentary, profitability , SP and PER of SGH. I only need to be half correct in trying to peer through the mist ( do a lot of it in jockland) for SP to react positively. PER is less than 0.5 for heavens sake ...Redde plc PER is 19.5. For a $200M + profits group ...in bonkers territory.
IF the banks have material dilution in the very short term plan you can put a big red line through all of the above scenario painting. However it is all logical , reasonable and likely. I know they could but WHY would THEY?
Mel ( putting more oats in the cauldron)
SGH Price at posting:
26.0¢ Sentiment: Hold Disclosure: Held
