I opened my laptop this morning for the first time in 10 days.
Geez, it was a nice feeling.
Since Christmas Eve, I decided the best thing I could do was to power down and log off.
I even ditched the kindle to read an actual book. You know those paper things that bend and take on the shape of your handbag if you’re not careful? Yep, one of those.
Even better was the fact that the book had nothing to do with the markets. Wizards First Rule was my holiday read. It was about as far away from economic stuff as I could get.
Sure, I’ve got four books sitting on my desk about complexity theory, inverse probability, behavioural economics and analytic methods crying out to be read.
You know what? That’s what a new year is for.
For me this Christmas break was for not thinking about the market. After a day or two of sweaty palms, I realised my world wasn’t about to fall apart if I wasn’t watching the prices tick over.
And then today, like most people at this time of year, I accepted that my mental shut off period was over. And there in the business section of The Age was the news that Dick Smith has gone into a trading halt.
On the first trading day of the New Year.
My first thought was, this isn’t good.
The early weeks of a new year are generally a low volume trading period. Capital raisings are rare, as most people are on holidays.
In fact, when you write about the markets for a living, this time of year is painfully boring to write about. Because nothing happens!
When I read the reasons for the trading halt, my second thought was relief.
When the share price dropped last October from $1.27 to 77 cents per share after DSH downgraded their profit guidance for 2016, I quietly added the company to my watch list.
At the time, DSH said that a forecast net profit after tax (NPAT) for 2016 would be $5–8 million lower, at $45–48 million.
I honestly didn’t think it was that bad. I mean, even if NPAT fell into the lower end, it still beats last NPAT of $43 million.
A month later in November, when the share price fell from 66 cents to 30 cents, I finally decided to take a look at the financials. Surely the company couldn’t be that bad.
Has this trading halt changed my mind? Even reading the headline ‘This could be the End of The Road for Dick Smith’, I remained bullish on the stock.
I was either too ignorant or too arrogant for my own good. It was a good thing I decided actually read the announcement from Dick Smith.
As it turns out, the DSH was trying to work out its ‘funding position and debt financing covenants’.
It was at this point I realised that Dick Smith was about to be wound up. I clearly wasn’t the only one that worked it out, either.
According to the Sydney Morning Herald, analysts say the reference to debt financing covenants ‘indicated that the expected write-downs may be even larger than already flagged.’
David Cooke, the director of investor relations reckons the company will resume trading Wednesday morning.
The chairman of Dick Smith, Rob Murray said this morning that short term funding wasn’t gaining the sort of support they’d like.
In other words, to buy more stock over the next month or so, Dick Smith couldn’t raise the cash from its current lenders.
That alone tells you there are serious mismanagement problems within the company.
Yesterday, before the receivers were brought in, the chief investment officer at Forager Funds Steve Johnson said, ‘receivership could be around the corner. Disk Smith is a very niche business and it is getting out-competed by Harvey Norman and JB Hi-Fi.’
Another analyst, Matt Ryan of Forager Funds, wrote a blog post titled ‘Dick Smith is the Greatest Private Equity Heist of All Time’ in October last year.
Ryan’s view is that Anchorage Capital stripped inventory from the retailer before Dick Smith’s IPO.
I don’t know if this is true. However Anchorage Capital did buy Dick Smith from Woolworths [ASX:WOW] for $115 million in 2011. They floated DSH with a market capitalisation of $520 million in December 2013, raising around $345 million for the company in the process.
The initial public offering saw DSH shares list at $2.20, with the shares peaking at $2.40 in January 2014. Roughly one month after its debut.
Then overnight it happened.
Dick Smith bosses called in McGrath Nicol to appoint an administrator. And its two major creditors, NAB and HSBC, have been said to appoint Ferrier Hodgson as the receiver.
Exactly how bad Dick Smith’s books are will become known over the next 12 months as the administrators unwind the company.
I didn’t buy shares in Dick Smith, but there’s going to be a lot of unhappy people who did.
Editor, Strategic Intelligence
From the Port Phillip Publishing Library
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