I’ve been looking back on some previous SGI straws and found a Management straw posted by@wtsimis 4 months ago after the AGM. It always good to look back at the promises!

“The AGM saw Mike Arnold provide some clear bullish signals for the business in which how they are wining and will be able to continue to win.

I would summarise these as follows

Objective over the next 12-18months will be to simplify the business after three acquisitions in FY 22 to be more efficient via reducing costs , duplication, optimising supply chain. This will see 2.2mill added in NPAT for FY23.”

Mmmm, $2.2 million added NPAT for FY23? Is this still feasible?

Thanks @DrPete for your detailed straws. I have been following with great interest. I previously owned SGI IRL and no longer hold. However if margins improved as suggested by Mike Arnold I would certainly be back in.

Since listing SGI’s track record for net margins have been thin and erratic, 2019 (1.2%), 2020 (0.3%), 2021 (2.8%), 2022 (1%) and forecast FY23 (1.5%). So the best net margin since listing has been 2.8%. Even if net margins could be lifted to a consistent 3% this would dramatically change the valuation of the business.

The resulting return on equity has also been mostly single digit and erratic, 2019 (5%), 2020 (3.1%), 2021 (10%), 2022 (5%) and forecast FY23 (10%). If the margins lifted to 3% this would double ROE from 10% to 20%.

If I use McNiven’s StockVal Formula assuming ROE of 20%, book value of 15 cps, a payout ratio of 20% (fully franked), you could expect a 17% annual return on a current share price of 21 cps.

On the other hand if net margins remain at 1.5% (FY23 forecast) giving you a ROE of 10%, and assuming a payout ratio of 20% (fully franked), you could expect an 12% annual return on a share price of 12 cps (today’s share price)

So clearly the value case for SGI lies in fatter net margins. I think the market is thinking that a 1.5% net margin is as good as it gets.

Disc: not held