A straw hat in winter, possibly..., page-19

"IMO, the normal capital allocation process is CAPEX for the business, then dividends. i.e. dividends are what gets paid from the balance of the FCF after sustaining and growing CAPEX is paid."

On the basis of your argument that CAPEX includes all capital allocation, and given that you object to boards paying dividends in excess of what is left after CAPEX (including growth capex such as acquisitions), it then follows that you believe certain growth opportunities should be overlooked, or the dividend should be cut to accommodate those growth opportunities.

If that was the case, very few companies would be able to invest for growth, even though they had excellent cash generation abilities that would be able to rapidly repay any

I tend to adopt a business owner mindset when it comes to investing, i.e., I say to myself, "If I owned this business outright, what capital flow outcomes would I endorse?" In this case, because of the strong surplus capital generating characteristics of the company (OCF covers PP&E Expenditure by a factor of 4 times, which sits in the top decile of companies), I am more than happy to take my normal dividend out of the business in addition to spending money on expanding the business, because the extra capital that I need to source to fund that expansion, will be able to be repaid within a relatively short period of time [*]



I view intangibles as "ugly" because very rarely are they worth what the balance sheet says they are. (look at SGH and the balance sheet and the intangibles). If VRT was ever to be liquidated, the assets as expressed on the balance sheet would IMO, not be realised. If a large proportion of the assets are intangibles, then it, IMO, presents a false view of the strength of the balance sheet. I am a firm believer in the balance sheet assets being a representation of what can be realised for cash.

But even if they aren't worth their carrying values, so what?
The debt is not secured against those assets. The lending, in VRT's case is made against the company's cash flows, not its assets (as with all asset-light, IP-heavy businesses).

The problem with SGH - which makes it a bad analog for VRT - and the thing that made the company go teets-up, was not the high level of intangible assets; it was that the company didn't generate sufficient cash flows to service the debt. The high level of SGH's intangibles was incidental, not causal, to its demise.



[*] In FY2017 there was a $4m capital shortfall, after PP&E Expenditure, Acquisiton and Dividend payments. To put this into context, VRT today (even at a point close to the bottom of the IVF cycle) generates OCF of some $40m pa, it requires around $10mpa to be spent on PP&E to keep the lights on, and the dividend costs it $23m. All up, that's a $7m surplus under steady state conditions today.

That means that the $4m capital shortfall that was incurred in FY2017 will be neutralised in a period a little longer than 6 months.