Silverchef still needs a polish
We applaud management's decision to wind down GoGetta. Now it's the core business that needs a polish.
‘Shrinking to greatness, by exiting GoGetta, is the way forward for SilverChef (ASX:SIV). That was our conclusion when we looked at it a year ago, and that's exactly what has happened.
Management said it was placing GoGetta, its general business lending business, into run-off back in February, prompted by continued underperformance and a breach of its debt covenants.
We applaud the decision. GoGetta was always a lousy business and the main reason we steered clear of Silverchef, but now its days are numbered our interest has reignited. That and the share price being 50% lower.
Two things now occupy shareholders' minds: how much of GoGetta's book can be recouped in run-off, and what's in store for the hospitality business.
Management has said it expects to collect GoGetta's entire receivables book but we think that could be optimistic. After all, large provisions were taken in the first half and 'significant challenges' are expected with light commercial loans. We're expecting much lower collections.
Which brings us to the hospitality business, which finances equipment for cafes and restaurants throughout Australia, New Zealand and Canada.
Hospitality is an unforgiving industry. But instead of attempting to predict which hipster cafe will fail, Silverchef has several mechanisms to protect it from the ones that do.
The first is its narrow focus on the hospitality space. The second is confining new customers to one-year leases (that charge high rates of interest). The third is requiring a large upfront security bond from the customer. The fourth is an in-house refurbishment capability.
Together, the mechanisms allow repossessed equipment to be refurbished quickly and re-leased in the event of default, which limits Silverchef's losses. But after looking again at the company, we were disappointed to learn it had paired back one of its protective mechanisms.
Silverchef's security bond used to be equivalent to 13 weeks of a one-year lease, providing ample time to re-lease the equipment without incurring big losses. When it did so within 13 weeks, Silverchef could even churn customers profitably.
But some time over the past few years it has been reduced to just 6 weeks. We doubt they're twice as fast at refurbishing and re-leasing repossessed equipment, which means they're taking more risk than they used to.
More aggressive competition is the most likely explanation.
AxsessToday (ASX:AXL) listed in late 2016 and it's achieved rapid growth in its loan book since, helped by doing away with security bonds altogether in favour of personal guarantees.
It's little surprise to see SilverChef pare back its security bond when a competitor forgoes them altogether.
Perhaps a 13-week bond was always too much, and rightsizing was needed to reduce the risk of Silverchef being disrupted. The other possibility is that credit quality has been sacrificed in the name of growth.
Ultimately, it will take a full credit cycle to know for sure.
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