Ann: Market Update - 30/06/15, page-12

"Trading EBITDA MP is $25m, so maybe Trading EBIT = $0
Some restructuring and one-offs - allow for margin of safety
Op CF = 18 mo interest (allow for some fees) = ($10m) say
Cap ex based on recent past = ($21m) say
total debt reduction required = (38.5m)
susbtotal (69.5)
So sales of PPE required over next 18 mo ~ $69.5m."


MM,

Again, I think you've made another arithmetic error.

It seems that you are looking at the next 18 months and you are accounting for Interest of $10m and Capex of $21m over that 18 month period, both of which are probably fair, if not conservative. (Remember that Net Debt is falling so the Interest Payments per half will end up being less than the $3.2m recorded in DH14, so Interest Payments over the next 18m will certainly come in under $10m, and Capex I suspect will total closer to $15m ($5m per half) than $20m over the next 18 months... given the asset base is reducing in size by about 10%pa, so too should the capital requirements).

So it looks to me lime you've added the $10m in Interest to the $21m in Capex, and then adjusted this figure for the $38.5m debt reduction required per the amortisation schedule, in order to arrive at the figure for the PP&E that needs to be liquidated,

i.e., $10m + $21m + $38.5m = $69.5m of required asset sales.

But what about Net Cash Receipts? You have completely omitted to account for Net Cash Receipts which, based on a $25m pa EBITDA run rate, and assuming no working capital release (an unlikely outcome...see discussion under [*] below) means Net Receipts of $25m pa less $3m pa of restructuring charges,

i.e., Net Cash Receipts of $25m - $3m = $22m pa, or $33m over 18 months.

Factor in this figure to your required rate of asset sale and you get $69.5m - $33m = $36.5m, which is bang in line with management's (I mean, the bankers') target of $20m to $30m asset sale over the course of Fy2016.

For further clarity, putting all these figures into a more conventional cash flow statement structure yields the following (for the next 12 months):

OPERATING CASH FLOWS:
EBITDA = $25m
Change in Working Capital = Nil
=> Net Receipts = $25m
Restructuring Payments = $3m
Interest Payments = $6m
Tax Payments = Nil
=> Net Operating Cash Flow = +$16m

INVESTING CASH FLOWS
Capex = $10m
Asset Sales = $25m
=> Net Investing Cash Flows = +$15m

FINANCING CASH FLOWS
Dividends = Nil
Repayment of Borrowings = $31m
=> Net Financing Cash Flows = $-31m

Change in Cash Balance = Nil


So that's a $31m reduction in borrowings over 12 months, or $46m over 18 months.
That's comfortably ahead of what the amortisation schedule calls for.


[*] Working Capital Considerations.

The above exercise assumes zero cash being released from working capital, which is at odds with what has been happening as the business's revenues have slowed.

Working capital has been liberated on a consistent basis in recent times:

Working Capital Balance:
DH12: $45.8m
JH13: 35.6m
DH13: 36.1m
JH14: 32.6m
DH14: 25.7m

While I expect a continuation in this trend, has not been included in the exercise as above, as discussed, it but could easily contribute a further $5m or so over the next 18 months to Operating Cash Flows, and hence debt reduction.


"However for shareholders, it would obviously be very nice if the operating business was carefully protected as a workable going concern, as the very significant value of the Plant and Equipment might depend on this, even if the goodwill value is negligible."

I disagree. I reckon thinking "going concern" on the part of management only delays the realisation of asset value by liquidating the assets, which is what is required for it to be converted into shareholder value.

The "going concern" strategy is why things have taken as long as they have; because management keeps delaying to take the hard medicine because it keeps waiting for a recovery in demand, which they have finally accepted isn't going to happen.

So for mine, what is very much needed - and which is now clearly happening - is for Mr Banker to keep his foot firmly on the throat of the business.

As for the goodwill to which you refer, it is already zero, having been completely written off in the company's books with the FY2014 full-year result.