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Smudged Silver Chef Regaining Some Lustre

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At $5.26, the pain of Silver Chef shareholders of December 2013 now offers an attractive entry to those who missed the boat first time around.

Australia has a highly concentrated stock market. The top five stocks in the S&P/ASX 200 Index – Commonwealth Bank, BHP Billiton, Westpac, ANZ and NAB – account for almost 40% of the index. Add to those Telstra, Wesfarmers, Woolworths, CSL and Woodside Petroleum, and the top ten stocks account for more than half of the Australian market’s benchmark index.

One of the consequences of this situation is that fund managers are very keen to back stocks that give them other exposures, and look capable of growth. When a newly listed stock does start to show good earnings growth performance, it can, given the perceived dearth of growth opportunities, become a market darling virtually overnight.

That was certainly the case with equipment rental and leasing business Silver Chef Limited (SIV).

Silver Chef listed on the Australian Securities Exchange (ASX) in May 2005, raising $11.2 million at $1 a share.

Fund managers loved the story. Silver Chef was the first - and only - dedicated hospitality equipment funding business in Australia. Restaurants, caterers, cafes, coffee shops and takeaway food operators could rent or lease their equipment, freeing-up their working capital and preserving their cash flow. In particular, the franchisees of more than 100 franchise brands in the fast food, coffee and cafe sectors became natural customers of Silver Chef. The company expanded into New Zealand.

In 2008 Silver Chef launched GoGetta, a division that was aimed at extending the flexible funding, short-contract offering to a wider variety of industries, in the commercial equipment market, with rental, leasing, and rent-to-own options, for everything from trucks and construction equipment to fitness studio fit-outs, new equipment of second-hand. GoGetta’s selling point is that it is open to all levels of businesses, even start-ups, and will consider all applications.

Across both businesses, the Silver Chef twin mantra of Rent-Try-Buy and Rent-Grow-Own were generating nice fat margins. Return on assets averaged in the 13%–14% range; return on equity, about 24%. Silver Chef continued to grow earnings throughout the GFC, although the share price retreated.

In the 2012-13 financial year, revenue surged by 36% to $114.4 million, and net profit rose by 27% to $11.5 million. The fully franked dividend was lifted by 19% to 28.5 cents a share. Hospitality rental assets rose by 33% to $173.4 million, while GoGetta’s equipment book swelled by 53%, to $84 million. By September 2013, the company was valued at $249 million, with a share price of $8.50, and a price/earnings (P/E) ratio of about 22 times earnings. Analysts were calling the share price target at $9.18. The company announced it was expanding outside Australia and New Zealand for the first time, moving into Canada.

Everything was going smoothly - but at that level of P/E, it has to.

But in December 2013, Silver Chef stunned the market with a profit downgrade, saying that profit for the December half-year was likely to be down by 5%–10% on the previous corresponding period, and that full-year net profit was likely to be 10%–15% below the previously provided FY14 guidance of $13 million in net profit and EPS of 44 cents.

The company blamed the lower guidance on slower asset acquisition and leasing volumes within the GoGetta business, as the malaise in the Australian small business sector hit.

The downgrade was a major loss of face for the high-flying stock. Analysts slashed their earnings and dividend growth estimates, and Silver Chef shares had a miserable New Year period, falling to $4.80 by early February, and touching a low of $4.65 in May before finding a bottom.

SIV has since recovered to $5.26, and at this point, represents a much more attractive opportunity than it was in December. At this price, the forward FY14 P/E becomes about 13.3, falling to 12.2 times FY15 prospective earnings. That is a heck of a lot more palatable than the 22 times earnings investors were being asked to pay just eight months ago.

The FY14 fully franked dividend yield of 5.2% and FY15 yield of 5.5% have also become more attractive from the 3.1% and 3.3% respectively at which the shares were priced back in December.

Quite simply, the market now takes a far less starry-eyed view of Silver Chef than it did back then. The reality – that it will take some time for the GoGetta business to regain momentum and the Canadian expansion to show meaningful results – has hit home.

At $5.26, the pain of Silver Chef shareholders of December 2013 now offers an attractive entry to those who missed the boat first time around. The new (more realistic) consensus target price of the analysts who follow Silver Chef, at $6.03, gives a bit of room to make some money, with the 5%-plus dividend yield as a sweetener. Nothing has changed in the business model except a bit more clear-eyed appreciation of Silver Chef, and the knowledge re-learned, that a market darling should not always hold that status uncritically.

View More Articles By James Dunn

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au



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