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I recently commented on Siteserv (SSV:ID or LN) here, and as I worked on another set of valuations for TGISVP, I couldn’t resist returning to the subject:

Any chance the Exchange could put a health warning on this PoS?! Management muppets were recently forced (in response to media comment!) to come out with a statement. The key sentence is: ‘At this stage it is not possible to predict the outcome of this exercise nor quantify the financial impact for shareholders.‘ Don’t be fooled, there’s only one way this ever works out: Zero value or absolutely massive dilution for shareholders.

They had some good news, though: ‘However the exercise is not expected to have any negative impact for staff, customers, key business relationships or suppliers.‘ Aah, so all the primary stakeholders will be taken care of then…

Shareholders should have known better… While Siteserv’s revenue dropped sharply in 2010, their balance sheet’s been financially strained for years. But how can I blame shareholders when you read their latest results (only 2 months ago!?). Financial highlights included ‘Revenue growth of 9%…Operating profit growth of 4%…Profit after tax up 60%…revenue visibility of circa €265m‘. More relevant highlights might have been:

Debt increased 2%

Operating Cash Flow declined 58%

Operating Free Cash Flow turned negative at EUR (677)

Capex increased 84% vs. the prior 6 months

We borrowed 100% of our latest EUR 4.2 mio Interest bill

Actually, they did comment a little on cashflow: ‘Working capital had a negative impact on cash flow in the period reflecting the Group’s continuing focus on driving revenue growth….Net capital expenditure…also reflects the Group’s commitment to fund growth.‘ Oh, so that’s alright then…

There is plenty of management corporate speak to rip apart, but let’s keep it simple – this is an absurdly distressed company, but instead management preferred to focus intently on:

‘Growth‘ – mentioned 16 times in the latest report

Growth derivatives: ‘up/strong/expand/increase, etc.’ – 12 times

‘Wins‘ – 7 times

Win derivatives ‘secured/awarded/launched, etc.’ – 17 times

This kind of copremesis is absurd. Have these joeys any idea they (should) answer to shareholders, or are they just f***ing clueless..?! The banks aren’t much better – we’ve read plenty about their breathless f***wittery regarding their property loans (check out Matt Cooper’s ‘Who Really Runs Ireland‘, and Simon Kelly’s ‘Breakfast with Anglo‘, among many others). Siteserv, however, is a wonderful example of them losing their minds in their regular lending business also. How they ended up in this situation, then let it continue, and even permitted further working capital/capex investment in the past year simply defies belief…

In the past twelve months, Siteserv had revenues of EUR 176.2 million. Presuming the bankers can scare up some, as is rumoured to be the plan, don’t expect any potential buyers to bother much with historic results or management’s helpful commentary. There are no free passes here. Recent cashflows are going to be a key determinant of value. Operating free cashflow for the last twelve months was EUR 4.6 mio, for an OP FCF margin of 2.6%. The last FY OP FCF wasn’t much better at EUR 5.8 mio, for a 3.4% margin.

I don’t see why anybody would pay more than, say, a 0.25 P/S ratio for this kind of business. Sure, they’ve revenue visibility of EUR 265 mio – but most (non-contract) companies could reasonably expect to capture 1.5 years worth of revenues through repeat/fresh business anyway. I also don’t see any particular reason to believe significantly higher margins are embedded in Siteserv’s future book of business. This P/S tag equates to about EUR 44 mio – compare this to EUR 156.4 mio of debt. I’d estimate buyers would have to be confident of a rapid quadrupling of (operating free cashflow) margins to even contemplate paying a price that bails the banks out. And that, of course, is wishful thinking – even if there’s a buyer who can envisage that happening, do you really think they’ll be keen to pay up accordingly?

So I think we can safely (and unfortunately) assume there will be nothing left over for shareholders either way. Despite that, Siteserv’s market cap has been trading at EUR 2.2 mio (or higher) – whoever’s selling is at least salvaging something of their investment, but who’s buying?! Ignorance, or blind hope, are never friends of one’s portfolio…

Hmm, then again…with management’s annual compensation worth a multiple of their shareholdings value, I’m sure they’ll be motivated to fight the good fight for shareholders! If they can persuade the banks to carry on, say for the next decade or two ’til their retirements, they could probably pay down debt to manageable levels and make some real money…

What? Oh, for the shareholders, of course…!