SGH - Slater and Gordon

[galumay]

I realised that in my original post I had not updated my returns on the SMSF, its actually up 21.4% for the 6 months of this FY so would have been 28% without the mistake of SGH.

 

[notting]

The yearly performance being a little less glorious one feels!!

 

[galumay]

Getting a bit off topic, but yes, the 12 months calendar year would be less impressive, roughly 26.5%. For me its the performance relative to the benchmark that is important more so than the outright gains/losses.

 

[skc]

I guess step one is should I have invested at all? In hindsight I still think it was a reasonable decision with the information I had at the time, I think I have improved my analysis over time and I am not sure I would buy into a company with similar metrics now. So my increased rigour, expanded metrics and better understanding of businesses may be enough to avoid another SGH - but i have no real certainty about that!

In hindsight there were lots of things wrong with SGH without Qunidell... So the initial investment decision was definitely incorrect. The caveat is that it fooled many other investors as well. The lesson here is to improve your assessment as you have already done. So bad decision, lessons learnt, life goes on.

The perfectly correct time to sell was soon after the Qunidell acquisition. It really didn't take much research to see that QPP was a big risk (if not a guaranteed lemon), and the balance sheet of SGH was transformed for the worse. The share price was still holding up so a sell then would have been ideal. The lesson here is to make sure you make an objective assessment when a company makes some wholesome changes... being objective is the difficult part given that you already hold.

With regards to capital raising... it's rarely wrong to buy at a discount to prevailing market price... even just for a quick trade. You could sell some existing parcel or short some with another broker so your overall exposure is kept at the desired level.

Writing down these thoughts has probably helped clear my thinking and my summary would be that there is probably not anyway for me to avoid the risk of a catostrophic outcome like SGH, sometimes I will get it wrong and lose money, but overall my strategy still sees me performing well ahead of my benchmark.

I don't think your summary (bold part) is correct based on the above.

 

[Knobby22]

I never bought SGH but I had a few duds. One example was MYX, great win but gave up a third of the gain before I sold. If I had kept holding I would have given it all back. It is hard to0 sell at the top but not that hard to get out reasonably quick. There are always "bargain hunters" or better named "unquantifiable risk takers" who who will buy them off you. Hat held HHL up yesterday? Big fall now.

I was pretty please with my return this year of 19% including dividends so 21.4% sounds pretty good to me Galumay.

 

[galumay]

I don't think your summary (bold part) is correct based on the above.

Hi skc, happy new year, and thanks for adding your thoughtful contribution to the thread and my post in particular.

I think what I said holds true in the context I posted it, I am not confident that I have identified and would again identify the specifics that would have warned my that SGH was not a good company to invest in at the time I did.

Its easy to be less than honest with myself, and say, "yes, lesson learnt, I wont make that mistake again." - but thats exactly what people say all the time when they really have no idea what they did wrong and therefore are actually doomed to repeat it!

I am genuinley not convinced that I can identify the elements that made SGH a poor investment when I first took a position. When I look back at my notes, research and analysis it all looks convincing enough!

I agree the warning signs may have been there with the acquisition, I certainly didnt spend enough time analysing the changed company.

Also i get your point with capital raisings. Thanks again for the input.

 

[So_Cynical]

The lesson here is to make sure you make an objective assessment when a company makes some wholesome changes... being objective is the difficult part given that you already hold.

The $8 top got me, selling for less seemed just wrong, ended up selling for 50c eight months later.

My objectivity is suspect when it comes to selling.

 

[galumay]

The $8 top got me, selling for less seemed just wrong, ended up selling for 50c eight months later.

My objectivity is suspect when it comes to selling.

Good point, and an abject lesson about anchoring bias! I find the decisions about if and when to sell are the most difficult ones to make in investing.

I know for every SGH I can quote many other examples where I have held on to companies after considering taking profits at some point and they are worth much more now!

At least you had the sense to get out at 50c, i am still holding at whatever SGH is now.

 

[Klogg]

I am genuinley not convinced that I can identify the elements that made SGH a poor investment when I first took a position. When I look back at my notes, research and analysis it all looks convincing enough!

I agree the warning signs may have been there with the acquisition, I certainly didnt spend enough time analysing the changed company.

Galumay - firstly, your results are great - good work. I can only assume you aim to improve on them by looking into any investment losses. Great idea.

In regards to SGH - I'm not sure the only time to identify an issue was at the time of the Quindell acquisition. The EGP blog (which I believe you read) had a few mentions of SGH and the rising WIP but poor cash flow before this point - he hit the nail on the head. That said, it's not that it's blatantly obvious, just one of many risks.
If it were obvious, everyone would have seen it. But there's a risk there that wasn't identified.

I've made similar mistakes where the risks were there but I failed to identify them (every time I think I'm doing well, I look at the IQE share price. How did I think that many acquisitions would just go smoothly...)


@Knobby - I think MYX is a totally different case. The company is not in danger of not meeting its interest payments, and directors are very much aligned with shareholders. In fact, if I owned MYX 5 years ago, I'd probably still own it.

 

[galumay]

.... The EGP blog (which I believe you read) had a few mentions of SGH and the rising WIP but poor cash flow before this point - he hit the nail on the head.

Thanks for the words of encouragement klogg, unfortunately I had already taken a postiion in SGH when Tony wrote his most detailed post on SGH. I fell victim to a couple of biases in my decision to continue to hold despite his analysis! I hadn't read his earlier posts on SGH at that point because I wasnt aware of them.

Again I am reminded that nothing is concrete or absolute in this game (life?) - Tony also has sold out of a few positions in businesses where I chose to continue to hold and have been well rewarded for my patience and conviction. I am constantly reminded of how easy it is to persuade ourselves of what we want to believe, when it suits us!

So the 'easy' and wrong path is to say "Tony was right about SGH, therefore my error was in not selling when I read his blog post about SGH and the path for improvement is to avoid buying anything he sells or posts negative analysis of." This would give me the false comfort of assuming that I had learnt from my mistake, and had put a process in place to avoid repeating it.

This is similar to the point I made in reply to skc - if I am honest with myself, I have tried to understand where I went wrong investing in SGH, but I remain less than convinced that I might not make a similar mistake in the future.

Sorry for those bored by my lengthy waffle, which is probably more about psychology than SGH!

 

[skc]

SGH came up with an announcement this morning confirming what most already knew.... that the senior debt has been sold to distress debt funds at <25c in the dollar, and that a debt to equity swap deal is close to happening. What I don't understand is why did the stock rally? Did the punters read a different announcement to what I read?

The announcement read to me "SGH now officially belongs to the lenders, prepare for the dilution announcement". Yet punters seem to have read "SGH is saved with debt holders taking a big haircut".

Yes the original debt holders have taken a large haircut and yes the company most likely won't fold (it still could, like MBN), but this really is only good news to the employees and future equity holders. Just because the debt changed hands at <25c in the dollar, the amount of SGH's liability hasn't actually been reduced. The face value of the debt was over $700m, and there's no way that SGH is worth that much on an enterprise value basis. So there's little doubt that the existing equity is worthless. Any scheme may throw a bone to the existing holders, like a notional $5-10m value, but it's beyond doubt that the existing equity holders will be diluted substantially from current levels.

For the record, MBN recap was done by the debt holders who put the company into administration such that a shareholder's vote is bypassed. The original MBN shareholders ended up owning just 1.8% of the company.... MBN shares went into suspension @ 1.6c and came back onboard at 2.6c after 9 months... a good outcome? If you ignore the fact that shareholders with 100k shares before the suspension ended up with ~1800 shares when trading resumed.

P.S. The massive spike in MBN share price in the week after trading resumption remained a mystery to me. It appeared to be a major error by market participants as they mis-interpret the impact of the recapitalisation?
P.P.S. Unfortunately MBN is now dead, again.

 

[galumay]

Its probably mainly the HC crowd!! Seriously though, I can only assume you correct with your analysis that the market is saying, "SGH is saved with debt holders taking a big haircut".

So much for the efficient market hypothesis! I can imagine there being plenty of sellers today, but the mind boggles at where the buyers come from to pick up shares up nearly 50% in a company like SGH! Is it also shorters being panicked out of their position?

 

[Knobby22]

Its probably mainly the HC crowd!!

I know someone who bought heaps at 7c and 10c as well as other low prices. I thought he was crazy but he would have sold today at a nice profit to the new buyers.

 

[skc]

I know someone who bought heaps at 7c and 10c as well as other low prices. I thought he was crazy but he would have sold today at a nice profit to the new buyers.

The hindsight outcome doesn't justify the action. I know a guy who never put on his seatbelt when he drives. He's never been caught, never had an accident and saves almost 2 seconds getting in and out of the car each time. Still not a sound decision though, is it?

The correct position size to trade SGH is assume 100% loss. So if he's trading anything bigger than that, I would consider it unwise.

 

[skyQuake]

The hindsight outcome doesn't justify the action. I know a guy who never put on his seatbelt when he drives. He's never been caught, never had an accident and saves almost 2 seconds getting in and out of the car each time. Still not a sound decision though, is it?

The correct position size to trade SGH is assume 100% loss. So if he's trading anything bigger than that, I would consider it unwise.

60m shares @ 10c= $6m of turnover which is quite low relatively. As with SCU, the buying frenzy can really go off if there's no instos to sell!
Agree with 99% dilution for the poor equity holders!

 

[skc]

60m shares @ 10c= $6m of turnover which is quite low relatively. As with SCU, the buying frenzy can really go off if there's no instos to sell!
Agree with 99% dilution for the poor equity holders!

AFR is reporting 95% dilution...

Slater & Gordon shareholders should expect to lose 95 per cent of the company's equity to its hedge fund lenders.

Read more: http://www.afr.com/street-talk/slat...xpartners-hired-20170418-gvmoiw#ixzz4efAPIzX0
Follow us: @FinancialReview on Twitter | financialreview on Facebook

 

[skc]

Finally, there's confirmation of the recap. 95% of the company for the lenders, with ~$40m of debt outstanding. It's a saga of epic proportion... a monumental mistake by management that's kind of beyond comprehension.

http://www.afr.com/street-talk/slater--gordon-poised-to-announce-restructure-sources-20170628-gx0vtt

So how much is SGH-reborn worth? There are lots of moving parts so it's difficult to pin down... but let's say the company can go back to making $40m operating cashflow per year, then a $500m market cap is probably not out of the question given a low debt balance sheet. It won't happen immediately of course due to market sentiment and stock overhang, but a eventual market PE of 12x is not totally unrealistic.

If total shares on issue (~350m) stays the same after the re-cap, that equates to $1.40 per share. Obviously those buying today @ 9c won't necessarily be better off... for every 100 shares one buys, it will be "shrunk" back to 5 shares upon the recap's completion. Given the re-cap is yet to complete, and the $1.40 guesstimate is some years away (and just a guesstimate), the current price of 9c is arguably a bit too high.

 

[Klogg]

The hindsight outcome doesn't justify the action. I know a guy who never put on his seatbelt when he drives. He's never been caught, never had an accident and saves almost 2 seconds getting in and out of the car each time. Still not a sound decision though, is it?

I like it. Sounds like the modern version of 'picking up pennies in front of a steamroller'

 

[galumay]

The hindsight outcome doesn't justify the action.

Agree totally, the danger is that you then assume it was skill that provided the outcome, I would suggest it was nearly all luck and could just as easily ended up with a total loss of capital.

 

[Garpal Gumnut]

SGH was a funny share for me. I bought low at $3.60 and then exited at $4.49 bit early with a good profit and then it took off, and up and up.

I was very annoyed. It went up and up and if I'd sold at the top I would have had a banger.

I thought of re-entering, but it's not my style.

I guess trading medium to long term is as much gut feeling as charting.

gg