Restructuring Progress
Shares in equipment financier Silver Chef (ASX:SIV) have recovered somewhat since our last update, after the company dropped out of the ASX300, causing benchmark-aware funds to reduce their holdings. Since then, management have provided updates on their plans to strengthen the core hospitality business by securing sources of funding, along with additional commentary on the efforts to exit the problematic GoGetta business.
What’s New?
In our previous coverage of Silver Chef in March (FAT-AUS-866), we provided our view on the company’s removal from the ASX300 Index. Consequently, the shares did fall as benchmark-aware funds had to make adjustments to their portfolios. However, we retained a positive view on the prospects for a re-rating, given the company’s financial strength, and the long term focus benefits set to emanate from concentrating on hospitality financing and withdrawing from the GoGetta business.
At this point that decision has proven warranted. Silver Chef’s share price has recovered more than 30% from the March lows, as fund rebalancing and selling pressure has tapered off while an influx of updates from the company front have boosted investor sentiment.
The first update
the company has provided since our last coverage was confirmation that debt arrangements had been renegotiated with lenders, and funding secured as part of the efforts to restructure out GoGetta which has consistently reported inferior credit performance over the last few years.
Source: Silver Chef (ASX:SIV) 28 August 2017 Company Presentation
The terms of the deal cover the company’s senior arrangements with its syndicate of lenders and includes a facility reduction program, repricing, and the resetting of covenants – in particular the $350 million Senior Corporate Facility (SCF).
First off, all cash associated with the GoGetta exit will be used to repay the SCF after meeting restructuring costs and the operating costs of the run-down. A separate amount of GoGetta debt of about $120 million will be created in addition to the remaining $230 million of hospitality debt and will follow a schedule of repayments from internally generated cash-flows from the GoGetta business. Management expects the debt to be fully repaid by March 2019.
Following that, the covenant package has been reset to cover only the hospitality business though this will lead to higher cost of short term funding. The company hasn’t provided specific details on this front but has announced that management will review the interest rates after the announcement of the FY19 results.
Second, he company has secured another source of financing from Westpac Bank to cover new Australian rental contracts. This facility is called “Securitisation Warehouse Facility” (SWF) and is similar to the SCF, but with increased flexibility and an increase in the Company’s overall lending capacity.
Management notes that this new deal will reduce the weighted average cost of capital. The initial drawdown of the SWF occurred in early April to fund new Rent-Try-Buy contracts. The company has split funding sources as the SCF will cover all new contracts in the New Zealand and Canadian businesses. Certainly over funding (and given Silver Chef is a financing business) was clearly a primary risk factor for investors, so we are heartened that this was resolved so quickly.
After the debt restructuring announcement, the second salient update is the company’s Letter to Shareholders dated 26 April 2018. with further details covering the restructuring and the company’s strategy direction going forward.
In the letter, the company explains the new direction it is taking after the decision to exit the GoGetta business which its blames for the 1H18 loss of $13 million:
Source: Silver Chef (ASX:SIV) 26 February 2018 Company Presentation
In the letter, the company notes four reasons why it is exiting GoGetta. First (i) is that the GoGetta was never going to match Silver Chef’s returns, (ii) GoGetta would hinder the company from expanding overseas while not having the same risk reward returns (opportunity cost), (iii) that it did not fit with the Silver Chef’s branding and strategic goals, and (iv) that Silver Chef (ASX:SIV) can deliver better shareholder returns alone than if it could combined with GoGetta.
Clearly the GoGetta business (and perseverance therewith) has seen a loss in shareholder value in recent years, but we find it hard to dispute the points above. Better also now to face up and admit the GoGetta strategy had flaws. Taking GoGetta out of the equation will also allow management to better focus on a narrower (and more profitable) core business with a simpler organisational structure that can better respond to a dynamic market. The Hospitality business, after all is a highly unforgiving business with many players failing on a daily basis.
That said, the company states that it remains on track to report a hospitality pre-tax profit of between $20 and $24 million, and a statutory loss of between $9 and $12 million, which includes the costs of running off the GoGetta unit.
However, we do recognise the risks involved in the winding down of GoGetta which currently has assets of $140 million and debt of $125 million. Management noted that they expect to collect GoGetta’s entire receivables book, though we have a healthy amount of scepticism as large provisions were taken in the 1H18 against “aged GoGetta arrears and unrecoverable rental assets” from Light Commercial Loans. SIV has a relatively high (~26%) exposure to Light Commercial Vehicles which have been a poorly performing asset category in recent history.
Thus, we are understandably expecting much lower collections from GoGetta. However, we do recognise that the Hospitality business is substantially better run, having mechanisms in place that allow repossessed equipment to be refurbished quickly and re-leased in the event of default, which limits Silver Chef’s losses.
In light of these factors still in place, we believe the best move in the interim is to wait-and-see until FY19 results are out to see how management has executed their plans.
Turning to the charts, and on the daily, 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, but more positively there has since been a bounce off the 61.8% Fibonacci retracement at $3.23. A further resurgence above $4.54 would improve the technical; 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 is indicated at the 78.6% Fibonacci retracement of $3.24. Prices have repelled this level, and it is important this continues, 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
Shares in equipment financier Silver Chef (ASX:SIV) have recovered somewhat since our last update, after the company dropped out of the ASX300, causing benchmark-aware funds to reduce their holdings. Since then, management have provided updates on their plans to strengthen the core hospitality business by securing sources of funding, along with additional commentary on the efforts to exit the problematic GoGetta business.
Going forward, we expect to see further short-term pain as the GoGetta business runs off, but we believe that over the medium-term this will deliver more optimal use of capital and management focus. Thus, we maintain a HOLD recommendation on the shares.
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 11 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.
