Holding on
Shares in equipment financier Silver Chef (ASX:SIV) have come under ongoing pressure since our last review at the end of February. As covered in that report, Silver Chef surprised the market by announcing that it was getting out of the GoGetta business. We wrote at the time that this would likely see further short-term pain, but we believe that over the medium-term this will deliver more optimal use of capital and management focus. We maintained a hold recommendation on the shares.
The market has chosen to disagree, and price weakness has been exacerbated by the company dropping out of the ASX300, effective 19th March 2018, as part of quarterly index rebalancing. This will have seen benchmark aware funds reduce their holdings.
While sentiment is clearly at a very low ebb, nothing has changed to alter our view of a month ago.
GoGetta (which provides financing to the transport and construction sectors) 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. The company will be refocussing on its core hospitality business and growth opportunities domestically and abroad.
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 saw 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 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 decision by Silver Chef (ASX:SIV) 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.
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.’
Clearly, the other challenges within the business have continued to weigh, and management will not have taken this decision lightly.
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. 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.
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.
Summary
Shares in equipment financier Silver Chef (ASX:SIV) have come under further pressure since our last review at the end of February. As covered in our last report, Silver Chef surprised the market by announcing that it was getting out of the GoGetta business. We wrote at the time that this would likely see further short-term pain, but we believe that over the medium-term this will deliver more optimal use of capital and management focus. We maintained a hold recommendation on the shares.
The market has chosen to disagree, and price weakness has been exacerbated by the company dropping out of the ASX300, effective 19 March 2018, as part of quarterly index rebalancing. This will have seen benchmark aware funds reduce their holdings.
While sentiment is clearly at a very low ebb, nothing has changed to alter our view of a month ago.
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.
From a valuation perspective much of the bad news has, we believe, been priced in, with the shares trading on a FY19 earnings multiple of 9 times. We maintain a hold 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.
