Spotless Group Holdings Ltd

SPO Details

Changes in Board: Spotless Group Holdings Ltd (ASX: SPO) has recently appointed Professor John Humphrey as the new Chairman of the Spotless Board following the retirement of Mr Garry Hounsell. Professor Humphrey had been an independent non-executive director at Downer EDI Limited between 2001 and 2016.

Downer’s relevant interest in SPO stays at 87.9%: With regards to Downer EDI Limited’s (ASX: DOW) unconditional takeover offer for Spotless, the group confirmed that the offer has been closed now. The offer was scheduled to close on August 28, 2017, with no further extension unless Dow could increase its relevant interest in Spotless shares to more than 90% for a compulsory acquisition, within that period. As of now, Downer has a relevant interest of 87.8% in the group.

Softness in FY17 result: Recently, SPO reported that its FY17 sales revenue of $3,006.3 million was down 5.3% from the prior corresponding period at the back of lost contracts and scope reductions, which was partially offset by the contribution from newly mobilised Public Private Partnerships (“PPPs”) contracts. Further, impairments, asset write-downs, takeover and transaction costs and other restructuring items of about $464.3 million impacted the EBITDA of $(199.2) million. Further, net loss after tax of $(347.4) million was reported to include $436.4 million of items (after tax) entailing contract portfolio restructure and takeover costs. The Facility Services result was decent and there was strong seasonal performance from defence and PPPs. However, Laundries performance was disappointing with regards to sales and margin, and market competition is expected to pose continuous pressure on margins. 

Cash Flow (Source: Company Reports)
 
Improved new contract wins: On the other hand, there was an improvement in contract renewal rates to 93% by number and 76% by annual value. Further, new contract wins surged to 66% by number and 21% by annual value. There was a good improvement in working capital management and cash collections that resulted in operating cash flows of $190.6 million against $141.7 million of FY16. SPO could also reduce the net debt to $782.3 million. However, the group did not declare any final dividend for the year ended 30 June 2017.

Outlook: SPO’s management has made very broad-level comments about the FY18 guidance and has indicated that it would continue to pursue growth opportunities in core markets. Management also expects to have momentum from a number of new contract wins and good renewal rates. However, SPO’s ability to sustain profitability is under question given the past performances.

Stock Performance: The stock had been under immense pressure in 2016, but rose about 42% in last six months at the back of Downer’s takeover offer. The stock has again fallen over 3% on August 31, 2017 following the recent close of the offer. Given the challenges faced by the group and trading conditions, we put a “Sell” recommendation at the current price of $ 1.10


SPO Daily Chart (Source: Thomson Reuters)

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