I can’t see how this will occur. Look at the figures for the AU operations, only (which is all that SGH is, now). They have been in decline for some years.
In f13, AU revenue was $298m, falling to $236m in f14, before rising back up to $246m in f15 and $266m in f16 (both years, on the back of domestic acquisitions and significant +ve WIP movements). F17 then fell to $227m and, if H18 repeats, then f18 will fall further still to circa $190m (assuming the status quo).
Of the H18 result, GEL contributed $13m so, annualising at upwards of $25m which (if resulting) will be <1/2 the f17 result of $55m.
Regardless, on a continuing practice basis (ex GEL), revenue will ultimately drop down towards $140m or lower on a continuing basis.
>2/3 of SGH’s recurring costs (could well be as high as 75-80%) relate however to PIL, not to GEL. Even the exit of GEL (per recent announcements) will not help the underlying profitability all that much.
So, if SGH normalises out at upwards of $140m going forward (even $150m), it will need to generate $24-27m in profits (not EBITDA or EBIT, but at least as NPBT) in order to justify a 16-18x earnings ratio which arguably is how the current SP is reflecting things. Trouble is, even on a normalised basis, the H18 costs came to $101m on $96m in revenue. Going forward, they will be able to take some of those costs out of the business (through exiting GEL), but unless they can get to an ultimate result (assuming even a very generous $150m) of <$120-125m in costs, then they not achieve a favourable result.
The main thing that they have to work with is staff costs. Reducing these however will not be enough. The best therefore that AU can get to (given its trending decline) is perhaps a recurring profit of $10 -12m (at best). More likely however, it will be less than half this to break even or still negative. At $4.12 therefore the SP does not reflect the reality of where the practice is heading to on a recurring basis. The artificial prop up in H18 will not repeat at F18 and certainly not in F19. But by then, it is very likely that SGH might be 1/2 the size of MB, comparatively speaking. The devil is therefore in the detail and the detail is in the timing, and the timing is how the future is now shaping up.
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