Ann: Revised Guidance for FY18 Full Year Financial Result, page-2

I always prefer for detailed and fulsome disclosure from companies, as any omission of detail or ambiguity leads to speculation on my part and I do not like having to speculate.

Looking at today’s and the announcement from 29 May 2018, I note the following:

THE GOOD
SND has stated clearly that the VIC problem project has now been completed, and expected losses have been provisioned for in the FY’18 result. Likewise, costs associated with restructuring of the business have also been provisioned for in the FY’18 result.

My reading of this is that all issues have been accounted for in the FY’18 result and there will be no financial contagion into FY’19. However, if I was working as an analyst I would want to confirm that explicitly with management.

Net cash remains a healthy $12.4m, though down slightly from $14.1m at 1H’18.

THE BAD
On top of a problem VIC project contract, there is now also talk of a NSW maintenance project contributing to the FY’18 loss. Hopefully, SND will provide a bit more color around this with the full year report in August. Client delays stuffing up project work in a business such as SND's is understandable. I find it a bit harder to understand how that can be the case with maintenance work. I look forward to SND explaining in more detail measures taken to tighten up contracts to avoid similar problems from impacting profitability in future – particularly in the maintenance operations.

While $10m in contract awards “predominantly” in the infrastructure division being won in recent months sounds pleasing, the overall $42m backlog number – presumably as at 30 June 2018 – is somewhat disappointing. Given lumpiness and timing issues of contracts, this might be insignificant, but again something that hopefully gets discussed in more detail with the August results.

“Organizational restructures” in my view are not always “one of” in nature and can end up being absolute disasters. I am not suggesting that this one necessarily will be one of those, but when zero detail is provided on what the restructure actually entails, then – based on historic precedent with other companies - my instinct is to assume the worst.

Without additional detail about the split between the contributions to the loss of the project contract, the maintenance contract and the exact nature of the restructure, it is difficult to form a view how SND might be faring in FY’19.

THE UGLY
The sheer size of the losses, taking a business that over the last 10 years – most of that period not including the recent CivilBuild acquisition - has generated an average EBITDA of ~$6m to a $3m loss.

IN SUMMARY
It is good that SND have apparently ring-fenced all issues so they will impact only FY’18 results. I believe today’s announcement was deliberately written to make this point. Whether or not that will indeed be the case – in particular as far as the organizational restructure is concerned - only time will tell.

Hopefully, SND will provide better clarity about the extent and nature of the restructure, specific measures taken to avoid a repeat of both project and maintenance contract issue recurring, ongoing margin pressure and measures taken to address this.

DYOR