Getting out of GoGetta
Shares in equipment financier Silver Chef (ASX:SIV) were marked down heavily yesterday, and have seen further weakness today, as the company released half year results and alongside this, a major restructuring. As part of a major strategic refocus, the company is exiting its GoGetta business. Silver Chef will be refocussing on its core hospitality business and growth opportunities domestically and abroad.
The company has previously highlighted an intention to look at GoGetta (provides financing to the transport and construction sectors) which has been the source of operational challenges in the past as we have highlighted. Silver Chef is ceasing sales and marketing of the GoGetta business, and exiting all existing customer contracts over the next 12-18 months in an orderly manner.
There will be costs associated with the closure, with management estimating redundancy costs to be in the order of $3 million before tax, which will impact the second half result. Additional non-cash impairments of $19.5 million will be taken in the first half.
The financial impact has seen the company record a statutory loss of $13.1 million for the six months to 31 December 2017, versus a profit of $4.6 million in the corresponding period. Silver Chef (ASX:SIV) expects to report a net loss in the range of $9 million to $12 million for the full year.
Source: Silver Chef (ASX:SIV) Presentation
The market’s reaction to the unexpected announcement was predictably harsh, but excessive in our view. We have outlined the problems that the company has experienced with GoGetta, along with ‘back book’ issues which we believed were surmountable. Indeed, the company had also expressed confidence in resolving these by the end of June.
However, the decision by Silver Chef to exit the GoGetta business completely is clearly an acceleration of management’s desire to focus on the core hospitality business which is performing well and more profitable.
At the half year, GoGetta accounted for 40% of revenue but 20% of earnings.
Management notes that for the full year the expected underlying hospitality pre-tax contribution to the result is a profit in the range of $20 to $24 million.
Source: Silver Chef (ASX:SIV) Presentation
The company has also noted the key differences that continue to resurface between GoGetta and the hospitality classes. The former’s credit performance has been consistently inferior for the past ten years, as has churn, the cash conversion cycle is monthly as opposed to daily, while the landscape has become increasingly more ‘crowded.’
The fraud event last year was dealt with, but clearly the other challenges within the business have continued to weigh, and management will not have taken this decision lightly.
Encouragingly at least, management has expressed confidence in realising the full pre-provision book value of the GoGetta business through the exit process.
Meanwhile, the core hospitality operations are firmly established in Australasia, and are performing well. The Australian rental base increased 6.4% from June 2017, while acquisitions helped drive a 16.9% increase in New Zealand. The unit’s contributed profit before tax and group overheads came in at $14.2 million versus $18.7 million last year. Impairment charges were lifted ($4.5 million in the half), but this was driven by two larger exposures in Aus/NZ, and we do not see this as a permanent trend. This is while Canada will become an increasing share of the revenue and earnings pie – targeting further expansion into North America should also be regarded positively.
Source: Silver Chef (ASX:SIV) Presentation
Part of the transformation project will include a restructuring of the Australian operations under a streamlined management structure, with ‘continued expansion in North America” and a “complete overhaul of the company’s digital capabilities.” The company will reposition as a single global brand, dedicated solely to hospitality.
Senior management focus will also increase (and post the GoGetta exit) on core operations, with executive changes including the appointment of Rob Phelps (a regional executive general manager) as President of Silver Chef Canada. We think this is a positive move, with North America positioned as a major avenue for growth, and the Canadian market bearing similar characteristics to Australasia’s.
Source: Silver Chef (ASX:SIV) Presentation
The announcement is a surprise in terms of the decision to make a clean exit from GoGetta, and reflects the issues encountered in the business. However, it is also a reflection of the strength of the underlying hospitality business and growth potential there, domestically and abroad. While there will be near-term earnings pain, we believe that over the medium-term this will deliver more optimal use of capital and management focus.
We covered in our last review the success of the $200 million securitisation funding activities, and the change in the makeup of the business will understandably have implications on debt structures. Management are renegotiating existing arrangements (to be concluded by the end of March) and restructuring financial covenants.
Meanwhile, the thirty-year-old company’s financial position is strong and as management notes, a ‘significant’ level of cash will be generated as it exits GoGetta. Ultimately, the foray into a non-core segment has not worked, and Silver Chef will (albeit with short-term pain) be better off sticking to what it knows and does best.
It was also noteworthy that management expressed commitment to delivering a sustainable return on equity from the hospitality business of 20-25%.
This is in keeping with the company’s overall historic performance, and if achieved, would likely see a substantial re-rating in the shares in our view.
Turning to the charts, and on the daily, the bearish moving average crossover present since December 2017 is suggestive of momentum to favour the downside. This is when the 50-day moving average (red line) crosses below the 200-day moving average (green line). Should the bears remain in control over the near-term, then key support is expected at the May 2014 low of $4.54 as marked by the horizontal blue line. Positively, the steep decline in share price has resulted in the RSI to decline into oversold territory, which implies that the bears could be beginning to run out of steam. In order for the short-term technical outlook to improve though, a decisive break above the 200-day moving average (green line) of $7.52 is required, as this would shift medium-term momentum back in favour of the bull-camp.
With reference to the monthly chart, a zone of support is located between $4.54 and $5.13, if the bears were to maintain control over the near-term. This is made up of the May 2014 low (horizontal solid-blue line) and the 61.8% Fibonacci retracement respectively. Should the bears drag prices below this price range, then an additional line of support is indicated at the 78.6% Fibonacci retracement of $3.24. It is important that the bulls defend our pre-identified support zones/levels, and a consolidation unfolds over the medium-term. Should this occur, then this would encourage a period of price-stabilisation to evolve over the coming months. However, it should be noted that technical damage has been done, and therefore, any rise in the share price will likely be slow-coming.
Summary
The announcement from management of the decision to make a clean exit from GoGetta has come as a surprise, and reflects the issues encountered in the business. However, it is also a reflection of the strength of the underlying hospitality business and growth potential, domestically and abroad. While there will be near-term earnings pain, we believe that over the medium-term this will deliver more optimal use of capital and management focus.
The thirty-year-old company’s financial position is strong and as management notes, a ‘significant’ level of cash will be generated as it exits GoGetta. Ultimately, the foray into a non-core segment has not worked, and Silver Chef will (albeit with short-term pain) be better off sticking to what it knows and does best.
It was also noteworthy that management expressed commitment to delivering a sustainable return on equity from the hospitality business of 20-25%. This is in keeping with the company’s overall historic performance, and if achieved, would likely see a substantial re-rating in the shares in our view.
There will though invariably be a settling of the dust as the transformation program is bedded down, and as the market digests the news.
Accordingly, we are moving our rating on Silver Chef (ASX:SIV) to a hold.
Disclosure: Silver Chef (ASX:SIV) is held in the Fat Prophets Concentrated Australian Share, Share Income and Small-Mid-cap managed account portfolios.
