Yes, indeed. This is a woefully inadequate update that has the potential to be highly misleading to anyone other than hardened and committed devotees to the stock.
One really needs to apply one's forensic accounting skills in order to get to the bottom of what's really happening here in terms of what the guidance really means.
For starters, I cannot for the life of me understand why they see fit to provide guidance in NPAT terms given the high degree of volatility in the effective tax rate, especially over half-years:
With that degree of variability, providing NPAT guidance is of limited value, I think.
And worse, when one considers the wide NPAT range of the guidance ($5.5 to $6.5m) this update borders on becoming meaningless.
By way of demonstration, looking at the Pre-Tax level (to get a better idea of the underlying operating performance of the business, without distortions caused by the tax line), and assuming a tax rate in line with the most recent two half-years (i.e., around 22.5%), then:
- At the bottom of the guidance range (i.e., NPAT of $5.5m), this has the business trading in roughly in line (down 2%) at the Pre-tax profit line compared to DH15, and 24% lower than the previous corresponding period (JH2014) [Note: JH14 was a near-record half (more on that later...see bend of this post), so the current half is cycling a very strong comparative period.]
- At the mid-point of the range (i.e., NPAT of $6.0m), Pre-tax profit would be 15% up on DH15 and 10% down on JH14.
- At the upper end of guidance, (i.e., NPAT of $6.5m), Pre-Tax profit would be 33% up on DH15 and 3% up on the very strong JH14.
And then when you add back the $0.5m asset revaluation currency loss it looks an order of magnitude better.
Also, they make explicit mention of restructuring of offshore operations (over and above new executive appointments which, presumably, will serve to boost revenue growth in coming periods), but no quantification is given for this restructuring exercise.
But assuming it amounts to a couple of hundred thousands dollars, when added to the $0.5m of asset revaluation hit, adjusted Pre-Tax profit in JH15 could be materially higher than DH14, and even close to - or ahead of - the very strong JH14.
So, post these adjustments:
- At the bottom of the guidance range, underlying performance in JH15 would be 17% higher than DH14 and 9% lower than JH14.
- At the mid-point of the range, underlying performance in JH15 would be 34% higher than DH14 and 4% higher than the very strong JH14.
- At the upper point of the guidance range, underlying performance in JH15 would be a whopping 52% higher than DH14 and 18% higher than JH14. [Note, if this last case applied, this would make Pre-tax profit (of $5.55m) in the current half the highest in over a decade and the second-highest on record (the $7.44m reported in JH2004, but that result included some profits on asset sale.)]
So the problem you have here with this guidance is that it can be interpreted in several different ways - all of them positive, by my calculations - but ranging from reasonably positive to very, very strong.
Yet the announcement, as you rightly point out, Imran Khan, reads quite negatively, at first glance.
Quite nuts, really, and almost defeats the purpose of providing an "update".
And really, when as a company you are just a few trading days away from the end of your financial period, you should have a far better grasp of how you are traveling than the disconcertingly wide $5.5m to $6.5m. By this stage you should be in a position to gauge your profitability with far more clarity than a 20% variance!
(*)
[More about the JH14 result, against which the current half result will inevitably be compared:
Revenue in JH14 of $35.3m was up 18% on pcp, so the current half-year is cycling a very strong starting base. So to be up a further 3% in the current half is quite commendable, although admittedly the weaker A$ would have partially contributed to that improvement.
But the real feature of JH14 was not just its very strong revenue performance, but that it translated into significantly higher profitability, as well.
As can be seen from historical numbers I've extracted from the company's financial accounts, JH14 was clearly somewhat of a standout:
Pre-Tax Profit (All figures in $m):
DH03: 3.42
JH04: 7.24
DH04: 0.39
JH05: 2.53
DH05: 0.86
JH06: 5.55
DH06: 1.66
JH07: 3.98
DH07: -0.48
JH08: -2.04
DH08: 2.56
JH09: 2.04
DH09: 2.00
JH10: 2.41
DH10: 0.61
JH11: 0.75
DH11: 0.61
JH12: 1.59
DH12: 3.05
JH13: 2.79
DH13: 2.76 JH14: 4.71
DH14: 3.66
JH15: 4.20 (Based on the mid-point of the guidance range, and before adjustments)
: 4.86 (upper end of guidance range)
: 3.57 (lower end of range)
So clearly, in the context of recent results, this update - providing it is properly broken down and analysed - is positive. Just how positive....well, that's in the eye of the beholder but in my experience with this company, it has normally come it at the upper end of the guidance it has provided.
SDI Price at posting:
52.0¢ Sentiment: Hold Disclosure: Held
(20min delay)
