Global Investment House: 1H10 Financials – A Closer Look: Looming Cash Crunch

GIH released its 1H10 financials on the DFM on the 15^th.

With these in hand we can look at a bit more detail – the good, the bad and the ugly – some of which was missing from its earlier press release.

SUMMARY

While Global's press release did some fancy dancing around the losses, the real story from the financials is a looming cash crunch this year. If we assume that cash income from operations can pay most of the operating expenses (except interest), as outlined below, Global has to pay an estimated KD39.8 million in principal repayments and interest for the rest of the year. Estimated adjusted Cash and Banks as of today is some KD40.5 million, leaving no margin of error.

The implications are clear.   

Global is under intense pressure: 

1. To come to deal with NBUQ on the KD71.8 million "frozen" deposit unless justice is swift in Dubai. In which case there is always one more appeal.  Perhaps, a "break-up" fee for walking from the deal?  It may be a small price to pay to unlock this much needed cash.  Forgive interest plus an additional sweetener?
2. To conduct major asset sales – which in this down market are likely to cause accounting losses. While these will be "paper" not cash losses, they will erode capital further which will erode market confidence. 
3. Sell debt or equity to a convenient أبو سكر or الهيئة
4. Or to cause a "miracle" at a subsidiary via a successful prayer through Wali Al Thouraiya. Luckily that saint's tomb is in Kuwait and not in Saudi where that sort of thing is frowned upon. At least officially. 
5. Whatever miracles might occur this year, thanks to Global's wise lenders who imposed an unrealistic and irresponsible three-year rescheduling tenor, the problem only gets worse next year and the year after.
   

ANALYSIS

Net Income

Unlike Global which danced around the earnings issue, let's go straight to the bottom line.

1H10 Net Loss was KD34.9 million versus KD99.7 million for the comparable six-month period in 2009. 2010's performance was affected primarily by losses related to various investments which drove operating income to a loss of KD8.6 million (2009: KD45.6 million). Operating expenses were KD26.8 million (2009: KD54.1 million).

A closer look at 1H10 Operating Income shows that GIH basically broke even in 1Q10 with a loss of KD0.4 million. 2Q10 the loss was KD8.2 million.

Operating Expenses were KD15.9 million in 1Q and KD11.9 million in 2Q. 1Q's personnel expenses were KD0.4 million higher than 2Q's, other operating expense KD1.1 million higher, interest KD0.6 million higher and impairment provisions KD0.75 million higher. Interestingly, personnel expenses were KD0.9 million higher in 1H10 versus 1H09. Perhaps performance bonuses? New hires? More than 50 MBAs as one of our frequent commentators would have it?

During 2Q10, while its fee generating businesses accounted for a respectable KD6.9 million in income (1Q10: KD5 million), these revenues were overwhelmed by losses on financial assets held for sale (KD4.1 million), losses on FVTPL (KD11.9 million), and losses on subsidiary disposal (KD2.4 million). To some extent this is not a surprise. Global's investments are market sensitive and the market declined in 2Q10. Also the company is on a forced "Jenny Craig" diet – selling assets to pay the light bills and its rescheduled debt.

Comprehensive Income

1H10's comprehensive loss was KD41.6 due to downward revaluation of financial investments (KD6.7 million) offset in part by a FX gain of KD1.1 million. The comparable figure for 2009 was a comprehensive loss of KD90.1 million as the Company benefited from a net KD9.6 million in unrealized revaluations.

Cashflow

1H10 cash from core operations was a negative KD18.8 million versus KD16.0 million the year before. When financing costs are factored in (you will see these at the very end of the section on operational cashflow), the numbers are a negative KD25.9 million (1H10) and KD32.6 million (1H09).  They  include principal payments on short term debt: KD10.6 million in 1H10 and KD24.4 million in 1H09. (Note:  The US$50 million (KD14.6 million) debt payment 12 July is not included in these financials).  These are the light bills that Global needs to pay to stay in business.

Cashflow from changes in operating assets and liabilities were a positive KD30.1 million in 1H10 and KD34.1 million in 1H09. Essentially Global is dis-investing from its operating businesses – through asset disposals. Also as its business activities and volumes slow, there is less need for "working capital", e.g., receivables, etc.   The bad thing about a strategy like this is that it's limited to the amount of assets you have to sell.

As a result of the above, total operating cashflow was KD4.1 million positive in 1H10 versus KD1.5 million positive in 1H09.

Investing activities in 1H10 were a net use of cash of KD12.6 million (largely associated with the closing of AlThouraiya in 1Q10). In 1H09 this category provided KD35.9 million in positive cashflow.

Financing activities were a negligible outflow of KD0.5 million in 1H10 versus KD4.9 million outflow in 1H09.

The bottom line a net reduction in Cash and Banks of KD8.9 million in 1H10 and a net increase of KD32.5 million in 1H09.

The pattern in operating cashflow is likely to repeat itself: operating losses from the core business plus negative cashflow from financing costs offset by a net inflow from further disinvestment/reduction in core operating assets and liabilities.

Balance Sheet

Global's assets have shrunk from KD1,011 million at 30 June 09 to KD823 million at FYE 09 to KD774 million at 30 June 10. This pattern is likely to continue as the Company continues to sell off assets and reduce debt.

Equity (excluding minority interests) continues a similar downward pace: KD213 million at 30 June 09, KD163 million at FYE09 and KD124 million at 30 June 10. Minority Interest also is declining. KD81.3 at 30 June 09 to KD31.0 at 30 June 10. As Global sells its less than wholly owned subsidiaries, it "loses" the Minority Interest associated with these companies.

There is another side to this coin (pun intended). It also loses the Cash and Banks associated with the sold subsidiaries. As disclosed in Note 6, the closure of Al Thouraiya "cost" Global KD18.725 million in Cash and Banks. At 1H10 (Note 8), KD37.2 million of the Company's KD92.3 million of Cash and Banks is cash at subsidiaries – which arises solely on consolidation and may not be under the Company's control – though the sad stories of Global MENA Financial Assets and Al Thouraiya may evidence Global's powers of persuasion, particularly where it controls the Board. An ability to persuade legally independent companies to take actions contrary to their interests and then settle the resulting obligations by taking fantastic assets instead apparently less valuable and pedestrian cash. Notwithstanding this "history", a conservative approach would be to discount Global's liquidity position by excluding the "consolidated" cash.

A discussion of cash would not be complete without referring to the US$250 million deposit frozen at NBUQ by the wise application of both impeccable transaction structuring skills and similarly impeccable legal document drafting. The saga continues. Global has won in the Court of First Instance. NBUQ is appealing. When this will be settled is not clear. We're only at Round Two out of a potential three round bout.

Looming Cashflow Crisis

Finally, as Global has noted, it has paid in principal payments US$78.9 million under the restructuring so far this year, leaving another US$92.6 million (roughly KD27 million). We can estimate the remaining interest for 2010 at roughly KD12.8 million by using 1H10's expense. The required debt service is KD39.8 million. Global's estimated cash on hand (excluding amounts arising on consolidation) is KD55.1- KD14.6 July principal repayment = KD40.5 million. This rough calculation indicates how close Global is to the "tripwire".

Global is under intense pressure to: 

1. Settle with NBUQ on the US$250 million "frozen" deposit unless justice will be uncharacteristically swift in Dubai. And if it is, NBUQ has the right of one more appeal. 
2. Sell assets. Under these market conditions, fire sale may be the more apt description. The result of which while they will be "paper" losses, will nonetheless inflict real damage on Global in terms of eroded market confidence following further erosions in capital. 
3. Sell equity or obtain debt from أبو سكر or الهيئة. One of our regular commentators suggested this may be a viable option, if things get difficult. 
4. Look to create a miracle with a subsidiary – an appeal to the regional St. Jude of financial institutions – Wali Al Thouraiya. Subsidiaries, watch your cash!
   

The problem is that this is only Year 1. Under the irresponsible and unrealistic three year debt rescheduling imposed on Global by its wise lenders and agreed by its wise management (probably at the financial equivalent of gunpoint), the problem only gets worse next year as the scheduled payments are larger than this year's. So Global could well meet this year's cash requirements only to find itself in the same dire situation on 31 December 2010.