Silver Chef

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

21 November 2016, 9:12 AM

Sectors Covered:

Diversified Financials, Professional Services

Fraud event impacts FY17; Operational gaps looks rectifiable

Silver Chef Limited (SIV) announced it has been hit by a fraud event, involving around $3.3m of contracts (A$2.3m after tax impact). The fraud occurred in the GoGetta division, which originates loans through the broker channel (fraudulent volume was concentrated through one broker). SIV stated that financial recovery options are being explored, however this is likely to be a protracted process and therefore the loss will be fully provisioned in 1H17.

Silver Chef have commenced a number of actions to mitigate the future risk of fraud, including:

• accelerating the implementation of bank statement evaluation software;
• vendor re-accreditation (meeting vendor principals for vendors with over A$200k of GoGetta exposure);
• increased internal audit resources; and
• potentially engaging fraud insurance.

Earnings skew material; 1Q17 otherwise on track

Silver Chef gave detailed earnings guidance, comprising:

• 1H17 underlying NPAT A$6.3-7.3m (vs A$7.6m in the pcp);
• FY17 underlying NPAT guidance maintained at A$23-25m; and
• reported 1H/FY17 earnings being impacted by the A$2.3m (after tax) fraud.

Guidance presents a material earnings skew (30%/70%). In 1H17, SIV will experience higher costs associated with the deferred origination cost accounting implemented and substantially higher employee expense costs. We expect employee salaries to increase approximately 30-35% year on year, primarily driven by 50 additional FTE's to manage the substantial increase in volumes/asset base. SIV commented that the cost base will be leveraged in 2H17 from higher revenue derived from an increased asset base and the ~10% GoGetta rental rate increase implemented in 2H16.

Outside the fraud issue, management commented that the business continues to perform in line with expectations in 1Q17, with acquisition and origination targets being met across both brands. In addition, credit quality of GoGetta contracts continues to improve based on changes to the underlying policy and deal approval processes.

Investment view

We believe Silver Chef has solid medium-term growth opportunities across GoGetta, Canada and further geographic expansion. Trading on 12x FY18F PE (vs 14x long-term average), we believe the valuation now provides a solid entry point taking a medium-term view. Key risks include deterioration in bad debts, increased asset churn, higher asset impairments and financing volumes not materialising as expected.

We upgrade our recommendation to Add.

More information

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Disclaimer(s): Analyst owns shares.

Morgans Corporate Limited was a Joint Lead Manager and Underwriter to the rights issue for Silver Chef Limited and received fees in this regard.

Morgans Corporate Limited was a Lead Manager to the placement for Silver Chef Group Limited and received fees in this regard.

A Director of Morgans Financial Limited is a Director of Silver Chef Limited and will earn fees in this regard.

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.