Will leave management out for the time being and only look at Asaleo's financials and business performance.
Let's start with a prediction based on what I found, then discuss what led to that conclusion.
Disclaimer: I don't have any financial interest in AHY going either way. Not working for or against AHY and not doing this out of any vendetta or whatever. I use their products now and then when it's on sale and thought it's pretty good on the nose and the behind. So take this for what it's worth - and DYOR et. etc.
PREDICTION:
Unless there’s a White Knight in shining armour bringing cash and miracles, Asaleo’s will crash around September 2017 when it’s due to repay all its $191m (currently) long-term debt. Its share price should get smash around late February to late March 2017 when it release its preliminary financial results.
Let's start with Financial Position, then onto cash flows. Its margins are showing great signs of gain... but you can make all the profit margin you want... it's the debt due but can't be paid that'll end you.
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ANALYSIS OF ASALEO’S FINANCIAL POSITION
No one financial ratio paint a complete picture of the company, and some ratios are more relevant to one company at its particular life cycle than others. So in discussing the financials, I will be selective and discuss what I think are most relevant to Asaleo’s. If this sounds like me being selective to make the case, you can always comment or email me regarding certain issues I might have left out or “missed”. I promise I will respond.
SOLVENCY | NOTES PAYABLE
Solvency, or internal liquidity, measures the company’s ability to meet future short-term financial obligations. As Benjamin Graham advised, we ought to look to the company’s current assets – assets that are currently liquid (e.g. cash) or ones it expect to realise into cash with the year – to meet current liability as a company needing to sell its long-term assets, or to raise equity or borrow, to meet current liabilities will either have its operations drastically changed or its ownership be dilutive to existing shareholders.
How are Asaleo’s current assets and liabilities composition compare to that of DickSmith before it collapsed?
For each year on the Solvency charts above, the Current Assets (CA) are stacked on the left while the Current Liabilities (CL) are stacked on the right.
Note how for DSH’s final two years, its cash (blue) and trade receivables cannot pay its trade payable obligations (black). In fact, DSH’s two most liquid CA only makes up about 1/3 of payables due to its suppliers and the like. Further, DSH will need to sell about 3/4 of its inventory to be able to meet all its CL.
Asaleo isn’t where DSH was, but its cash and receivables could barely meet its payments due to suppliers in FY2014, and some $4m below in FY2015. Looking to Asaleo’s entire CL due for FY2015, it will need to sell about 1/3 of its inventory to meet them – a deteriorating condition with higher inventory and slightly rising liabilities.
These are but one indication of deteriorating business condition. One that management explained away as, take the rising inventory for example, as due to new “investment” in machineries and disruption to supplies that then increase its inventory?
If we look at the notes on inventory, we’ll find that around $17m of the $20m increase to $159m between FY2014 to FY2015 are increased in “finished goods”, not much increase in raw material – so management’s claiming that installation new machineries and plants upgrade disrupt distribution and increase inventory etc., just does not hold true.
Assume for a moment that Asaleo can turn 1/3 of its inventory in enough time to repay its payables and other obligations; and does so in proportional costs or not much costs at all so as to not increase the liabilities. Can its cash flows from inventory turnover be enough to meet the CL and at least some of the long term debt that’s coming? Both interests and principal repayment on all $294m (as at FY2015, at HY2016 it’s about $320m).
Not without further borrowings.
How would further borrowings look if its $191m long term debt becomes short-term and due on 30th Sept. 2017? Within 1 year of FY2016. With the forecast 10% decline in revenue and some 15% decline in EBITDA.
Note the similar proportion of CA to total liabilities in both Asaelo and DSH. Though one could argue that it was DSH’s inability to meet with current payables that did it in; versus Asaleo’s just-making-it CA to meet its current payables; that those $295m long-term debt can wait. I mean, people uses Asaleo’s products everyday… so it should have little trouble moving the inventory into cash.
Cash flow next....
AHY Price at posting:
$1.50 Sentiment: Sell Disclosure: Not Held
