SID had a reputation to uphold

4th Jul '13 by Boros10

7 comments 7609 reads

I was a SID shareholder for a short time last year but decided to sell after meeting the management team at Mello Central in June 2012. I was particularly annoyed by management's assertion that they operated in niche markets with high barriers to entry when the business was clearly only capable of delivering low single digit operating margins. I also disliked managements’ use of EBITDA as its preferred measure of profitability given the Company’s need to spend significant sums on plant and machinery each year.

I try to avoid some of the pitfalls of value investing by borrowing from the quality investor’s toolkit, steering clear of low margin, cash consuming, low return on capital businesses operating in highly competitive markets. As a contracting business SID has many if not all of these features.

I was also concerned about the acquisition of EDS which I believed involved significant execution risks given its size relative to the rest of the business (although it would appear the current problems have largely been in the UK legacy business which might of itself indicate that management was overstretched).

More recently I heard Sean Nutley the CEO give a brilliant presentation at Mello in Beckenham. I was tempted to buy but in the end I was not prepared to ignore the one-off exceptional charges, challenging trading conditions in the UK and the pressure on working capital as reported in the two trading updates in March and April 2013.

A few weeks ago I went to a presentation given by management to a large group of private investors at FinnCap following the release of the half year results and the Edison report which hinted the Company might need to raise additional working capital to support business growth.

A lot of the discussion centred on whether SID could grow without raising new capital. Sean argued the business could grow by as much as 15% without the need for more cash. Given the poor working capital characteristics of this business I was surprised he thought he could squeeze out so much growth without more money.

I asked a question about capital expenditure (CAPEX) which had been incurred and was on the balance sheet but did not appear in the “cash flow from investing activities” section of the cash flow statement. It would…

Unlock with Email

Unlock with Google

Already have an account?
Login here

BrianGeee

5th Jul '13

Not too sure about the relevance of the Buffet quote in this situation, as I don't see a management with a reputation for brilliance, but a very helpful write-up.
It seems the IAS17 treatment of leases is currently under review, so perhaps this could be submitted as an example of where greater transparency is essential. For some more detail, see: http://www.ifrs.org/Current-Projects/IASB-Projects/Leases/Exposure-Draft-May-2013/Documents/Snapshot-Leases-May-2013.pdf

Boros10

I think it is fair to say we were all fairly impressed with Sean Nutley until the last meeting. Ian Johnson, FD, however failed to impress on the first meeting and he never really improved.

Maybe the title should have read "SID had a reputation to uphold unlike its management."

Thanks for the lease link, I'll steel myself to read it at some point today!

MrContrarian

That's a very good analysis. I should nail this simple red flag to my head:
"Management asserted that they operated in niche markets with high barriers to entry but the business was clearly only capable of delivering low single digit operating margins"

PS The Mello share performance at http://mellomeeting.co.uk/ includes only companies presenting at Sea Salt, Beckenham. The others are excluded because many are chosen by FinnCap, not David Stredder.

Many thanks Mr C. I've amended the post to reflect your point.

I'd only seen Silverdell management once previously at FinnCap, probably over a year ago, and wasn't too impressed. I'm aware there is or was a general enthusiasm for the company, but I didn't realise this was based upon the impression of management. They seemed an enthusiastic wide boy and a bumbler. Perhaps I'm being influenced by recent events, but I don't recall being impressed.

Brian, I was about to say, if you weren't impressed by management why did you invest. Then I remembered I recently invested a decent sum of cash in a company (and you know which one!) despite having the very same doubts. Doh!

Paul Scott

6th Jul '13

Hi,

Excellent post Boros10, many thanks for sharing your insights on this.

I also never felt comfortable about Silverdell (LON:SID) although I did buy a few after the positive trading update recently, although I sold them shortly after the latest meeting with mgt in June, as some of their answers were not convincing, and I had worries about their need for more working capital.
Also, and this is intangible, something just didn't feel right. Instincts, maybe I had subconsciously picked up on some negative body language or micro gestures? But I sold out after the last meeting, so to me that reinforces my view that once you've had plenty of experience meeting mgt of cos, those meetings are very valuable. Whereas when I first started meeting mgt teams, I was very gullible.

Furthermore, we should remember that SID is a strange case where we don't yet know what has gone wrong. Only one subsidiary is in Administration, and there seems a possibility that might have happened through some sort of disastrous administrative oversight connected with a relatively small winding up petition from a supplier, which should have just been shut down without any further consequences.

I don't believe that the Bank would just push them into Administration without first giving them time to do a rescue fundraising from the City.

So we do need to wait until we know the full facts. Te situation might be salvageable, altho' I think mgt would have to be replaced, and it would need a probably deeply discounted Placing to restore confidence.

Thanks for sharing re capex/leases. That sounds like straightforward false accounting to me. Capex should always be disclosed, and not netted off against borrowings.

Regards, Paul.

SID had a reputation to uphold

Unlock the rest of this article with a 14 day trial

About the Author

Boros10

7 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...