Hitting a Rough Patch
Shares in equipment financier Silver Chef (ASX:SIV) took a tumble in early July after an adverse trading update, and an issue that has arisen with ASIC which has created further uncertainty. We view the company’s medium-term prospects favourably, but it will likely take some time to regain investor confidence. That said an 8% surge in the shares today was interesting, given that there was no obvious catalyst in terms of market announcements.
Earlier the company announced a major restructuring of its business, including exiting the problematic GoGetta business to focus on its core hospitality business and growth opportunities at home and abroad. Although there will be some short-term pain from the move, we view the change in strategy positively as it will enable a more optimal use of capital and management focus.
Management highlights some key points in the transformation strategy such as a single brand dedicated to hospitality, unlocking additional growth in hospitality channels such as coffee and franchise. The restructure is also expected to create a simpler organisational structure in Australia, “creating national alignment and enabling operational teams to focus on delivering further growth.” Silver Chef will also expand into the North American market and build out its digital capabilities. While the North America market offers significant potential, we need to see how it is managed going forward.
The July trading update included a progress report on the run off process of the GoGetta business, which is performing in line with expectations.
Although management had expected customer pay-outs to increase after the announcement of the exit, positively this has not occurred and customer behaviour has remained unchanged continuing to pay their weekly rent and maximising the cash GoGetta is collecting.
Given that the company finished the financial year $12 million ahead of the debt amortisation schedule and said that trend is well placed to continue into the first quarter of FY19. At 30 June 2018, bank debt is at $88 million, with the written down value (WDV) of the GoGetta rental book standing at $104 million.
Source: Silver Chef (ASX:SIV)
The numbers in the above table do not include $9 million of GoGetta finance leases that were not sold in the securitisation vehicle. The company also noted that arrears are higher than expected and that poses a risk in the later stages of the run-off process. Management will continue to look for opportunities to realise some portion of the assets in the pool earlier than that would otherwise occur in the normal course of business to bring forward cash flows.
Besides the profit downgrade for the core hospitality business (discussed later below) Silver Chef (ASX:SIV) reports that ASIC has alleged a number of light commercial contracts issued by the discontinued GoGetta business in recent years constitute consumer lending without an appropriate license. The company says these contracts were all originated through third party finance brokers. Silver Chef has commissioned EY to undertake a review of all contracts and the GoGetta internal processes and is working with the corporate watchdog to resolve the matter. The financial impact is unknown at this stage.
The trading update also warned that growth in the final quarter of the year in the Hospitality segment was lower than expected. Underlying pre-tax profit for the segment is now pegged at $17 million to $18 million, down from the previous range of $20 million to $24 million. The downgrade was attributed to revenue shortfalls from rental contracts, additional finance costs associated with the recent bank restructure and increased impairments on rental arrears and suspended assets, with the latter largely due to the decision to increase provisioning “to a level that is optimal for ongoing management.”
The FY18 statutory results are scheduled to be released in August, but there continues to be a few areas that need to be resolved. Guidance provided in the July update warned of a FY18 statutory loss that “will be substantially greater than the previous FY18 net profit after tax guidance of between $9 million and $12 million.”
In the first half of fiscal 2018, the additional provisioning against aged GoGetta arrears and unrecoverable rental assets was mostly responsible for the statutory net loss of $13.1 million.
Source: Silver Chef (ASX:SIV)
Turning to the charts, and the technical picture has deteriorated since our last review. The bearish moving average crossover present since December 2017 has been 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). Key support at the May 2014 low of $4.54 failed to hold following the March announcement, while a bounce off the 61.8% Fibonacci retracement at $3.23 has proved temporary (that said the shares have lifted back above here today). This will need to be retaken near term to improve the outlook.
With reference to the monthly chart, the zone of support located between $4.54 and $5.13 did not hold. As noted, an additional line of support at the 78.6% Fibonacci retracement of $3.24 also has given way. The next support level is at $2.41. With the technical damage done, any rise in the share price will likely be slow-coming.
Summary
Despite facing what Silver Chef is calling its most challenging year yet, management believe the difficult decisions made are right for the long-term growth and success of the company, saying “both the Board and Management are confident that they will deliver the Group’s historical levels of growth and returns over the next few years.”
In prior coverage, we maintained our hold recommendation and espoused our view that we expected to see further short-term pain as the GoGetta business runs off, but that over the medium-term this would deliver more optimal use of capital and management focus. There has been a disappointing performance from the hospitality business since and the issue arriving with ASIC, understandably frustrating shareholders. The shares now trade on 13.5 times forecast FY18 earnings, with a projected 5.1% dividend yield.
We maintain a hold rating on Silver Chef (ASX:SIV).
Disclosure: Silver Chef (ASX:SIV) is held in the Fat Prophets Concentrated Australian Share, Share Income and Small-Mid-cap managed account portfolios.
