Warning – devil’s advocate post.
I’m not saying don’t take an informed risk. Just that’s its pretty binary bet at this stage with one leg being 100% lose – position size accordingly.
+1. Thanks.
---- below was written previously whilst out of range ----
Just before Christmas (can you believe it), VET-AU announced the outcomes of negotiations with its banking consortium. Excess cash above $20m (the amount assumed in the BLACK TOAST scenario as being a comfortable cash holding) was applied to reduce the outstanding balance and bring the facility down to $85m, now regarded as fully drawn. This is in-line with the balance sheet estimates for tangible cash assets as previously posted. The lack of borrowing capacity in a gross sense does not impact the break up valuations. It does impact cashflow buffer for ongoing concern valuations.
Key points for me:
⦁ This stock remains deeply troubled but has passed a major hurdle in the near term.
⦁ The facilility was in breach. The bankers ran the show.
⦁ The bankers could have cleaned their clock...but did not. There isn't even any mention of punitive interest rates. Surely this would have been mentioned if so??
⦁ They did have a cash balance as per BLACK TOAST, confirming a key aspect of underlying financials under a disaster scenario.
⦁ They must have positive cashflow expectations sufficient to satisfy the bankers or the facility would have been jammed right now.
⦁ The facility remained essentially fully drawn in terms of net cash as it was previously and available despite knowledge of two class actions outstanding. The bankers would know more about this than the public at large. The bankers remain in place.
⦁ Management went fully drawn in terms of the gross exposure, increasing excess cash balance, to try and keep the facility at maximum knowing that something was going badly wrong. This simple rouse was reversed by the bankers.
⦁ They will take a stack of non-cash write-downs as expected. This will be factored into the facility arrangements so reported earnings hits will not lead to another facility setback unless driven or accompanied by a deterioration of underlying EBITDA. There would be a credible plan to protect debt providers in the near term at least. It will be interesting to see how much they write down things. If it is worse than the figures implied by the BLACK TOAST scenario, a review of the ashes of this stock will be required as the existing thesis will be revealed as horse manure under the light cover of analysis. The (step towards the) truth will be revealed along with a reduction in underlying EBITDA guidance in the New Year. I suspect they will go hard at expense reduction and take another set of one-off charges associated with workforce reduction. The figures did not suggest the H1 cuts were that deep and were hoping for a recovery rather than reflecting the new, more likely, baseline.
⦁ Dividend has been cancelled, as you would expect in this situation, to preserve cash. A good move, if obvious. At least it wasn't a bad move.
⦁ This all occured as the CFO was in the process of leaving the firm and a temp replacement was being blooded in under fire. I'm sure the queue for the permanent position stretches around the campus - hehe. It is hard to say if he was pushed or resigned under pressure from the bankers. Probably found it all too much and pulled the pin.
⦁ They will be forced to cash drain the business with essentially no reasonable scenario for further acquisitions at any valuation. Excellent. It clarifies the valuation proposition. I wonder, though, if sales of existing busineses are in planning. If these are tested and are favourable, expect a massive rally. I'd say the scenario should be a live one under consideration and bids might be forthcoming.
⦁ This disaster story remains intact...but is one that continues to live and breathe and is largely free to roam within an organic growth environment. Furthermore, its shortcomings are beginning to be better understood. This is a major piece of uncertainty that has been passed. That is far from saying the coast is clear and this is a blue ribboned ride to a multi-bagger.
⦁ Management remains in place. We are not in a liquidation/administration scenario. That's saying something. OK for now - on a short leash. I still feel that there is a degree of alignment between bankers and equity in this situation and am much more relaxed (if that's the word) than I would be for a high tangible asset situation where I would just write my investment off and move on. Right now, the bankers are forcing management to act in an equity friendly manner.