WIP writedowns, page-4

Yup. Tread on toes and you get more ill thought through argument.

$144m NIHL spend by QPP . Bought for zero ( 50% profits split with QPP) SGH spend to 31 12 15 -= $30M
You have to assume another $30M spend to 30/6/16. So $60M cash out. WIP valued at zero ( because new SSAP means WIP can only be treated as an asset at or at assured fee likelihood. Well simple arithmetic tells us $250-300M cash coming in if is on plan to June 17.

In case you didnt notice SGH has already written WIP down, HUGE, resulting in huge paper losses. 15 % reduction is case take up means less WIP with no value in future. Yes it means profit reduction in future because case throughput will be lower . In the meantime there will be supernormal profit margin on that 15% WIP which reaches fee stage ...AND CASH DOLLOP> together with the exit from 90% of NIHL case throughput which will generate one off huge profit & HUGE CASH DOLLOP ( if on plan)

SGH will not have a problem generating large profits in the next 14 months, It does have a supernormal leverage problem. WIP reduction and NIHL should rapidly reduce the leverage to an affordable amount.

You are actually right 15% case throughput reduction and NIHL exit will give SGH a subsequent profits problem. While I believe SGH profits will actually approach $300M in yr to June 17 I can not help thinking that might be followed by 30% lower profits. I can live with $200m profits .

However odd it would be if SGH is not planning to shift resources to those parts of the group with highest ROCE and less lumpy profits. That is probably SGS. In my view SGS had the capability of churning out $200m EBIT. GO may ( ?)end up changing that, but I am clear there is a VERY high chance his proposals will be watered down and that the dominant player in the field ( SGS) will carry on churning out material profitability. Only time and events can tell.

Lets get really simple - WIP reduction should generate around $65 m over a case cycle. NIHL Good will pitch up net $220m in 14 month NIHL Bad will pitch up net $75M . SGH main problem is $710M net debt.
The question is - if NIHL is really bad - is the resulting net debt of $570m good enough for the banks?

I reckon NIHL will be somewhere in between and net debt of $550m will be an easy target with the hope for much less than $500M net debt as the management focus in 14 months.

Living with a debt ceiling of $550M shouldnt be a problem . As Tambourine man implies - maintaining profits approaching $300M on reduced case throughput and turnover after June 17 isnt likley.

The really interesting bit is the management focus on what next? Dont know.

Mel