Perhaps a Silver Lining?
Equipment financier Silver Chef (ASX:SIV) has recently released to the market a trading update covering the performance of its core business as well as the execution of a new $200 million securitisation funding arrangement with Westpac. This will be the primary focus of today’s report, as we peruse the details of the new financing arrangement and the overall update of trading conditions to 31 December 2017.
Recap
Before we proceed to the company’s trading update, we make a brief recap. Since peaking in October 2016, Silver Chef’s shares have been trending lower, in the wake of a fraud event where the company’s GoGetta unit suffered a $2.3 million loss when one of its leading brokers colluded with customers using fake identities.
With the dust settling on the incident, sentiment had started to improve earlier last year, but was dented further in August when the company missed guidance FY17 numbers. This was also despite some encouraging growth at the top-line. As shown in the graphic below, revenues increased 29.4% to $286 million, with the Canadian rental business reporting decent results as its rental asset base surged 81% year-on-year.
Source: 28 August 2017 Company Presentation
In our last review of the company (FAT-AUS-850) in November, we covered a more upbeat outlook provided at the Annual General Meeting. Management provided estimates that the current year profit would be up 18%-28%.
Since then, the company has provided the market with a trading update on core businesses, while also announcing an increase in debt capacity to provide funding support for expansionary activities.
What’s New?
On that note, we move on to the company’s trading updates.
According to the filing, for the first half of 2018 (1H18), the core business is performing largely in line with management expectations as the hospitality, construction and heavy transport channels were reporting decent trading. The hospitality business is the main growth driver this time around with both domestic and international operations reporting growth in line with expectations. To further support growth, management is specifically targeting the hospitality operations in New Zealand and Canada.
Source: 28 August 2017 Company Presentation
Moving on to specific business segments, the GoGetta brand continues to face ongoing headwinds with 1H18 expectations of lower acquisition volumes compared to the preceding period. Management explains that this weaker performance is primarily due to their decision to withdraw from funding in the Light Commercial (LC) channel which has been a specifically weak market segment.
Management also added that a reduction in LC funding will allow them to focus on improving on improving credit quality and return on assets (“ROA”). In fact, in the filing they noted that ROA at the group level remains stable while remarking that the changes being implemented will lead to substantial improvements in the GoGetta brand which will be included in the 1H18 report.
Over the longer term, we believe that leaving the relatively weaker LC channel is a prudent move as it reduces the working capital invested in an underperforming business. Although there will be revenue pains in the short term and some credit issues as well.
In fact, management highlighted some “back book” issues in the near term. Note that the “back book” relates specifically to the aged portion of the GoGetta asset base and is largely the poor performing contracts in the LC channel.
According to management, collection of arrears and repossession efforts have been challenging and they have begun working with outsourced ‘service providers’ in 2H17 and continuing to present. However, we note that there is still some work to do here, with arrears recoveries lagging internal targets, while asset recoveries are in line with management expectations.
Going forward, we will be keeping a close eye on progress in this area as management has committed that “back book” issues will be solved by 30 June 2018.
Increased Funding
Next up, another key development in our view is the company securing new funding sources to support their expansion efforts in Canada as well as in New Zealand. This approach is meant to securitise the lease receivables to fund the growth without having to access traditional bank loans or diluting shareholders with new equity.
In the filing, Silver Chef (ASX:SIV) has executed a new $200 million securitisation warehouse facility (SWF) in conjunction with Westpac Banking Corporation (WBC). The SWF has a facility life of three years and will be fully utilised by 30 September 2018. According to management, by then they may seek to have it extended to accommodate future growth or run-off on a self-funding basis.
We are encouraged by this development as it does not require Silver Chef (ASX:SIV) to inject additional capital beyond any loss contributions which are pegged up to 20% (~$40 mln). This arrangement, however, will decrease the company’s Senior Corporate Facility limit from $550 million to $350 million and reduce overall risk.
The company’s latest financial data is shown below.
Source: 28 August 2017 Company Presentation
Another important question is how this will impact Silver Chef’s capital structure. Initial management estimates note that the total group gearing (senior and securitised debt) is expected to remain in the range of 65-70% within FY18 but going forward, as greater reliance will be placed on the SWF, both gearing and
weighted average cost of capital are expected to decrease.
Turning to the charts, and on the daily chart, 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 support is expected at the September 2017 low of $6.46 (horizontal blue line). In order for the short-term technical outlook to improve, a decisive break above the 200-day moving average (green line) of $7.55 is required, as this would shift medium-term momentum back in favour of the bull-camp.
With reference to the monthly, a zone of support is located between $6.11 and $6.42, if the bears were to maintain control over the near term. This is made up of the 61.8% Fibonacci retracement (blue set of retracements) and the February intra-month low respectively. In order for the long-term technical outlook to improve, a decisive clearance of resistance evident between $8.59 and $8.88 is required. This consists of the 38.2% Fibonacci retracement (red set of retracements) and the July 2017 high (horizontal solid-red line) respectively. If this favourable scenario was to occur, then a resumption of the broader uptrend would likely follow suit.
Summary
Recently, Silver Chef (ASX:SIV) provided the market with a trading update covering the performance of its core business which have fallen largely in line with expectations. On the other hand, the GoGetta business seems to be having a few issues with its “back book” as a result of exiting from the relatively weak Light Commercial channel. Difficulties are being experienced in the collection of arrears and repossession of assets which are lagging against internal targets.
A plus side is the success of the securitisation funding which in our view unlocks wholesale debt capital and is a more efficient and provides a lower risk funding base for the company to expand, both domestically and internationally.
The company forecasts full year earnings in the range of $24 to $26 million which puts the shares on an undemanding earnings multiple of just 11.0 times. The FY19 multiple though drops to just 9.0 times.
Accordingly, Silver Chef (ASX:SIV) will remain firmly held in the Fat Prophets Portfolio. We recommend the shares as a medium risk buy for Members without exposure.
