Looking to: SAI Global

Looking to: SAI Global

SAI Global (ASX: SAI) is a company that we’ve identified as having some attractive investment prospects, but one that we prefer to watch rather than invest in. Since it has recently received an indicative and non-binding proposal from private equity, was it the correct decision to wait on the sidelines?

SAI Global helps organisations conform with regulations, standards and legislation. The company has three core divisions – Information Services provides information to comply with global standards (such as the International Organisation for Standardisation, or ISO); Compliance handles governance products (such as incident management or codes of conduct); and Assurance provides safety training, auditing and certification services (such as quality control in the supply of food).

Many of these services are a necessary requirement for its customers to operate, and provides SAI a high level of recurring revenue, a stable customer base and high barriers to entry. Prior to 2012, this afforded the company consistent earnings growth, and a rising intrinsic value, which we considered quality characteristics. Yet amidst this backdrop were two core issues that we believed were limiting the long-term prospects for the company.

The first was the unsuccessful replacement of its Compliance platform in the second half of the 2012 financial year. While the stickiness of the service minimised customer attrition, the company incurred considerable expenses to effectively manage dissatisfaction. Considerable investment has also been required to build a replacement platform.

The second issue is the insular nature of the three divisions. There has been minimal synergy across Compliance, Assurance and Information. What’s more, management recently acknowledged that the sales force was not well coordinated across divisions when approaching the same customers. It appeared that the culture within SAI Global was not conducive to sharing, and this has limited growth.

While the company had considerable potential to cut costs and drive synergies, we were sceptical these changes would be resolved in the short- to medium-term. By coincidence, Stephen Porges, who had been CEO of SAI Global for four months, suddenly had his position terminated.

The indicative bid by private equity has seen the SAI share price jump towards the highs of mid-2012 ($5.29). While we believe that SAI has the potential to return to its former position, we felt there was too much uncertainty in terms of the time this would take, or how difficult the transition could be.