The crane company, SA French, has finally released their audited financial statements for the year ended 30 June 2009 (over seven months later).  The construction-related business has reported a drop in revenue of around 7% that has translated into a net loss of R10,958 million (compared to the prior year profit of R6,935 million).

Based on this terrible performance the group's auditors have released a qualified opinion concerning the uncertainty surrounding the ability of the business to continue as a going concern.  Their report also includes Reportable Irregularities ("R.I.") involving issues surrounding VAT, but this is out of the scope of this article.

Back to the point, is SA French a going concern?

With EPS reporting a loss per share of 6,2c and has a remaining NAV of 31.7c (all tangible), thus implying that the group can absorb another around 5 years of similiar sized losses before being factually insolvent. 

Cash flow is much more of a concern, as a positive net cash balance at the beginning of the year of R9,9 million has become a net overdraft owing of R9,3 million.  A major cash out flow was from investing activities as the business has shifted more towards renting out cranes and away from actually selling them (this is born out of industry uncertainty pushing players to keep their costs variable).

Debt has managed to drop from a D:E of 0.99 at interim to 0.81 at final, although this remains significantly up from the prior year's level of D:E at 0.34.  Coupled with Quick and Current Ratio's dropping to 0.17 and 0.99 from 0.32 and 1.47 respectively at the same time last year.

So, essentially, debt is down, but remains high.  Cash is flowing out, but mainly from re-investment into and re-alignment of the business to the current economic environment.  Balance sheet liquidity remains fragile, but underlying assets also lack in risky intangibles and remain sufficient to absorb some significant future (potential) losses.  Finally, auditors are covering their backs and the integrity of the business systems are questionable surrounding the current VAT R.I. raised..  Gross margin has slimmed (partially as a result of higher volumes of lower margin crane rentals as opposed to outright sales) from 23.4% in 2008 to 14,6%, albeit, remaining profitable on this baseline.

Reading through the financials my impression remains of a well-run business, but one that is highly exposed to both current macro-economic risks and liquidity concerns.  The directors end off the report saying how "...in the interim period, subsequent to this reporting period, an average total sales level inclusive of rentals of between R5 million and R6 million has been achieved. This is in spite of a number of uncertainties that we do not expect to be present in the first quarter of 2010, and should, in our opinion, provide SA French with more opportunities for both sales as well as long-term rental contracts."

My conclusion: the odds are that SA French will pull through this down cycle into profitablity, but the levels of debt, liquidity concerns and the questions of its internal control's integrity after the R.I. are the major obsticles in its way.

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