SilverChef (ASX:SIV) & Shine (ASX:SHJ): fallen angels

March 19, 2018

Companies make mistakes. It often accompanies major change within an organisation, often involving management replacement or perhaps a new strategy to deflect from the maturation of a key business. What is for certain is that change is an important investment catalyst.
 

We saw a couple of examples this week of companies which have corrected errors – one we are happy to own and one where the jury is still out.

 

Silver Chef Limited (ASX:SIV)

 

Glennon Capital made great returns investing in SilverChef a couple of years ago.  The company made its name from the financing of ovens, fridges and other equipment for the Australian hospitality sector – restaurants, cafes, clubs and hotels. It found a good niche and dominated that market.
 

Then it moved into construction equipment finance, at around the same time the founding CEO gave up his day-to-day duties, handing over to a new team. Two investment red flags.
 

Sure enough construction financing has proven a vastly different (and poor) experience to that found in hospitality and the company recently announced its exit from the sector (closing down its GoGetta business). The share price has done nothing but decline since October 2016. But we don’t think all of the blame lies with the sectoral shift, it also has a lot to do with the founder stepping aside. The drive and passion brought by a founder is not easily replaced by new management, no matter how highly credentialed.

 

SIV has now changed tack again, taking its core hospitality skills into Canada, via acquisition, with the ambition to spread into the US. It is a more sensible decision in that the company is sticking to its knitting but it’s too early to determine whether the market gap the company hopes to exploit is as apparent as it hopes. And there’s still the question of management’s ability in the wake of recent disappointments.

 

Shine Corporate Limited (ASX:SHJ)

 

Shine on the other hand has reintroduced its founding management in the wake of, by its own admission, the mistake of injecting new management lacking industry experience who then hired relatively immature staff to what is a complex sector (personal injury law, class action law, transport law, family law). Clearly, an error represented by poor profit outcomes and coinciding with the Slater and Gordon debacle, leaving the share price well below the peaks of 2015.

 

Simon Morrison has returned to steady the ship, in turn hiring a raft of very senior lawyers to help run the business and a veteran CFO. So far the new team has steadied the ship, producing two reasonable profit performances and diversifying the business gradually into new fields of law.
 

It’s not out of the woods (particularly with a class action to defend) but with the aim of improving case management and cash flow conversion, utilising its recent investment in systems, and perhaps expanding via acquisition, there is a good chance the share price will continue to recover as consistency returns.
 

Glennon owns some Shine, but has not ventured back into SilverChef because Shine is further down the path of stabilisation and there is comfort in the people running it – and the price is right, running a forecast PER of 5.0x.

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