SAI Global Limited (ASX: SAI) was originally the commercial division of Standards Australia but was divested and floated on the Australian Securities Exchange in 2003. Standards Australia retained 40% of SAI following listing but has since reduced its stake to zero. SAI has an exclusive agreement with Standards Australia to distribute Australian standards until December 2023.
Last year, SAI avoided a $1.1 billion takeover bid from private equity firm Pacific Equity Partners. At the same time it announced it had dumped chief executive Stephen Porges just four months into his tenure.
Is this risk management services company a buy?
Revenues and net profits
According to SAI's annual reports (below), in the five years from 2010 to 2014 its revenues have grown by nearly 8% per annum from $392 million to $528 million. At the same time however, its net profits have been reasonably flat from $35,195 million to $35,462 million.
| Amounts in Millions | 2010 | 2011 | 2012 | 2013 | 2014 |
| Revenue | 392,842 | 428,739 | 452,743 | 479,268 | 528,537 |
| Net Profit | 35,195 | 45,007 | 42,578 | (43,104) | 35,462 |
Cash flows
From 2010 to 2014 SAI's 'cash flows after investing' were negative $81 million due mainly to a payment of $198 million for payments for purchase of controlled entities (net of cash acquired) in 2011. The good news is that the last two years have been positive.
As well as the negative $81 million in 'cash flows after investing', SAI paid dividends totalling $79 million, and after accounting for foreign exchange effects and other financing cash flows the company was left with a funding gap of $182 million. In order to fund this gap SAI had to increase its borrowings by $101 million and raise new equity of $130 million.
Balance sheet
At the end of 2014, SAI had $67 million of cash and cash equivalents, its debt was $247 million and it had $343 million of equity on its balance sheet. Its debt has increased by nearly 40% in the past 5 years and its debt to equity ratio is high at 52%, which is why it has been able to maintain a good return on equity of around $13%.
Forecast earnings growth is strong
SAI's earnings per share (EPS) has been flat for the last five years at around $0.20, but is forecast to grow in 2015 to $0.27
Competitive Advantage
SAI has an exclusive agreement with Standards Australia to distribute Australian standards until December 2023. Commercial terms of the agreement must be renegotiated by December 2018. In 2023 the contract will end and SAI could be replaced, but the facts are that SAI is the incumbent distributor, it has a proven track record, it has established client relationships, and is an Australian business.
I think there is no significant advantage in Standards Australia replacing SAI Global as the distributor.
Other positives for SAI
- Risk management services are a growing sector underpinned by government regulation and an increasing focus by corporations on risk management
- Compliance and assurance services clients tend to remain with their incumbent provider meaning SAI earnings have a recurring nature
Outlook 2H 2015
In February this year SAI reported that, "Operating results across the Company continue to perform in line with internal expectations, overlaid by the impact of the weaker Australian dollar. As a result, the guidance range for underlying EBITDA has been increased to $120 million to $125 million (up from $115 million to $120 million). Further charges relating to operational efficiency initiatives and the implementation of the new operating model will be incurred in the second-half. These will drive improved profitability in FY16."
Verdict
For me, SAI is going through a large transitional phase.
They have a reasonably new CEO Peter Mullins, who took over in early November 2014.
While he's confident he can lift organic growth rates across the company, when you take a look at the company's ASX company update, dated May 7 2015, you will see headings like, new organisation structure, new website going live in September, and complete roll out of global accounting platform to compliance services.
All of which mean that the company is in a large transitional phase. I will be giving SAI 12 months to implement these changes and then take another look.
