There’s always been two teams on the SGH threads – Believer Bulls (majority) and Sceptic Bears (minority) – with wild and inaccurate claims all about.
But we need to deal with the future – so I’m going for my usual approach - Boring Realism. (Uncertain whether HC is the right place for this though ….)
So if you’re squeamish in the face of realism - do not read any further.
To estimate value of SGH shares, I came up with my best and worst case scenarios for 2017.
Best case scenario for 2017 :
For Best Case – I just use SGH’s normalised EBITDAW 2016 2H figures as a basis :
Assuming H2 FY16 EBITDAW earning levels carry on through 2017 financial year, and all the 2016 non-recurring expenses go away (not really realistic) then the EBITDAW figure for 2017 year would be 102.8M (2 x $51.4M).
It’s also reasonable to assume that 4th quarter 2016 was better than 3rd quarter (since these improvements never happen all at once) – so if (at a guess) 4th quarter was 25% better than 3rd quarter, it’s reasonable to add 12.5% to the $102.8M EBITDAW figure above to give $115.6M as a fully year EBITDAW figure for 2017, based on 2016 Q4 performance.
We then work forward from the EBITDAW figure to see what the earnings (or loss) per share might be for 2017 FY. I added non-recurring expenses of $20M to the calculation below as it’s not realistic to assume there will be none. (SGH was spending around $1M per week on consultants in 2H 2016 FY – so some will be ongoing.)
Tax situation is a bit complex - nothing would be paid to tax authorities in this situation for 2017, but they still have to account for it in the financial statements (deferred tax) – so I’ve put it in at average rate of 25%.
So best case scenario in my opinion is EPS of about 10 or 11 cents for 2017 FY, which may mean the shares are worth around $1.05 one year from now. Though this does ignore the SP limiting factors of high gearing and distrust of board and management.
Worst Case for 2017:
Worst case revolves around the likelihood the company is only still alive because the Banks haven’t had any better options. So worst case for SP - if it happens - will probably be a result of an adverse event – such as:
- Dilution: Someone may come along wanting to put capital into SGH. The Banks will, if they can, force the BoD to accept.
- Possible forced sale of SGS, at a low price, which leaves a large debt and limited earnings upside
- Administration - Cash flow problems will lead to administration, as the company has no further avenues of raising funds (debt or equity).
After 2017:
- Best case is not all that rosy. Difficult to see anything better than medium levels of incremental earnings growth.
- From 2018 onwards, the class actions will become a factor. SGH made itself a big target in 2015, so this will turn out expensive.
- If they have a good 2017, one year from now may present a good exit situation.
My Valuation:
My guess is it’s a 70% chance of Best case and 30% chance of Worst case – so my 12 month valuation (just my opinion – not a recommendation) is 73 cents (70% of $1.05 + 30% of $0).
My other scenario was 60% chance of SP of $1.05, 20% chance of $0.50 due to dilution, plus 20% chance of $0 - but it gives the same result – 73 cents.
But then again, I may not sell if it goes over 73c during the next year - only smallish holding at low entry – so have to consider the Denbo fun factor of being a holder.
