When the Going Gets Tough…
In our Mid-Week Alert last week, we provided a brief notification to members about the latest update on Silver Chef’s (ASX:SIV) fiscal year 2018 (FY18), with the company announcing that it expects a statutory loss of $48 million, largely related to the company’s exit of its unprofitable GoGetta business. There was also a brief on the company’s dividend suspension and capital management plan. Today, in anticipation of the results due out on Thursday, we cover the guidance update in greater detail.
What’s New?
To recap, in February, the company announced its 1H18 results which already foreshadowed some weakness ahead, with the business unit losing some $12.8 million after tax. That weighed on the group, leading to a $13.1 million loss in the 1H period. This is summarised below:
Source: Silver Chef (ASX:SIV) 26 February 2018 Company Filing
Management, in light of the weaker results provided guidance expectations for FY18 of a statutory loss of between $9 and $12 million. This reflected the costs that the company will incur from the decision to exit GoGetta.
As we’ve noted in previous reports, the decision to exit GoGetta, is prudent in our view to focus on the core hospitality business, which has historically accounted for circa 60% of revenues and 80% of the profits. We believe this will create more value to shareholders while removing the problematic GoGetta business will lead to a wind down of the company’s overhead structure. That said, this will take time as the company undergoes a transitionary period.
The graphic below summarises the “best case” scenario, based on the FY18 outlook in the 1H18 results, where the company would see the upper end of expectations:
Source: Silver Chef (ASX:SIV) 26 February 2018 Company Filing
However, in the latest guidance update, management noted that in the process of their “transformation efforts”, they have encountered a number of areas that need to be resolved, which includes setting up a customer remediation program under the supervision of the Australian Securities and Investments Commission (ASIC). This would entail a material amount and the company has set aside an undisclosed provision.
ASIC has also alleged that GoGetta has engaged in consumer lending without the appropriate licences. Aside from that, the company also expects to write down the expected returns from the loan as the unit gets wound down.
There are also some further borrowing costs that the company has to wind down and renegotiate its financial covenants with some of its lenders. On the plus side, the company still has the support of its lenders and expects to gain some appropriate waivers.
The company hasn’t provided specifics at this stage though it did provide a hint of the debt impact by the end of the FY18 in its July 2018 filing as shown in the graphic below:
Source: Silver Chef (ASX:SIV) 04 July 2018 Company Filing
To further strengthen their balance sheet, the company is currently in discussions with other parties to provide subordinated debt to supplement the capital structure. In anticipation of that, it seems that management has reduced the debt burden with the announcement noting that the debt balance at 31 July came in at $77 million compared to the close of FY18’s $88 million shown in the graphic above.
All in all, the Hospitality business is expected to contribute within guidance expectations of between $17 and $18 million while the overall statutory net loss after tax is expected to be around $48 million.
Going forward, as the GoGetta runoff gets completed, we expect Silver Chef to make a comeback with a “tighter” business focus and more robust balance sheet.
Summary
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 to long-term we expect a comeback to take place with Silver Chef (ASX:SIV) delivering more optimal use of capital and a greater management focus on its core competency.
The shares now trade on 7.5 times forecast FY19 earnings, with a projected 9.8% dividend yield, setting a low bar to outperform going forward.
At this juncture, we maintain a HOLD rating on Silver Chef (ASX:SIV) and await the results out due this Thursday (30 August 2018) to adjust our view.
