CST Growth Projection

Well, well, well. After so many years of trying to make intelligent guesses about the future financials of Cellestis, out of the blue the Company has given us a sales forecast for the next two years. 

Now, like all forecasts, we can't really accept it as gospel and we do need to be cognisant of the disclaimer.


I do note that an earlier slide in the presentation presents what could be interpreted as an even more aggressive growth. It suggests that the number of tests sold might increase from the 1.9m in 2010 to between 2.6m and 2.9m in 2011. That represents a sales growth of between 37% and 52%. Without further knowledge I can only assume that the disparity is due to the mix of geographic sales (slightly varying prices) and some allowance for the vagaries of the Foreign Exchange rates.


Anyway, for my exercise, I have taken the (lower) financial figures of a Revenue growth of between 30% and 40%. Of course, for anybody that has watched this Company for any length of time, it is easy to make the assumption that they will have been quite conservative with their forecast. I would have no doubt that they will achieve their minimum target (30% growth) and would have a good chance of achieving the maximum (40%). Dare I say " or even more"?


Using these figures I have taken my previously released Growth Projection spreadsheet and made a couple of changes.

• I have corrected the historical figures to reflect the COGS reclassification that has been previously dealt with. I also added the forex gain to the historical figures that was previously overlooked (by me).
• I have made a change to the way that I project expenses. Previously I had these set as a percentage of Sales. On reflection, I don't think that made a lot of sense. Instead I have simply put in an annual growth figure for expenses. In the sample provided I have set this at 10%. Frankly, I don't really know how close to reality that is (Expenses growth from 2009 to 2101 was 9.9%). It's up to you to change it if you think fit.
• I have set the Income Tax at a flat 30% of Net Profit Before Tax. We do still have some tax credits in overseas jurisdictions so the tax may well be a little less than this, particularly in the next year or two. Better to be conservative than overly ambitious!
• I have set the COGS at 34% which is the figure from 2010. This may decrease slightly over coming years but once again I am keeping this conservative.
• I have not taken into account Foreign Exchange rates at all. The entire projection is expressed in Australian Dollars. Movements in the exchange rate could have significant impacts.

It's important to bear in mind that, even with the the forecast provided by the Company, we are still making a lot of guesses here. The fragility of the model increases as time moves forward, of course. I seriously don't expect growth to remain constant over a ten year period. Growth spurts (tipping point?) or unexpected events could have major impacts. However, regardless of all that, I think the projection has some value in painting a picture for us.

Anyway, you should be able to download the spreadsheet here. (File ->Download as-> whatever)

In the sample version provided I have set the Revenue Growth at the very lowest end of the forecast (30%). I'll leave you the pleasure of seeing what happens when you change it to a higher figure.

I won't provide any further commentary on the Spreadsheet here, other than to make one observation that is very obvious. At the Dividend payout ratio of 60%, the mountain of cash builds very quickly.

  

Logically thinking about shareholder belief.

I've previously had stuff to say about the mistaken belief that movements in the share price can tell you something about the actual business. (To find out stuff about the business you need to look at ... the business).

Now, I am thinking about the contention that seems to be common that movements in the share price tell us something about the market view (faith, belief) in the Company.

I am led to believe that about 7 million Cellestis shares have been traded in the last year. Given that some of those shares will be the same shares that have traded hands multiple times, it might be reasonable to presume that, in the last year, about 5 million shares have actually been sold. That's around 5% of the shares on issue. Now, clearly, the buyers of CST shares have been a little shy and this has resulted in the Share Price retreating.

These are just facts. However, I don't think those facts can really tell us anything at all about the shareholder faith in the business that they have invested in.

Remember, 95% of the shares in the Company have not changed hands in the last year. Those shares are not represented at all in the trading statistics, depth or on any charts. 

The holders of those shares might hold all sorts of views about the Company or business - there is just no record of those views. Not even a tenuous link through the Share Price. They might have absolutely no faith in the business but are not selling because they don't want to take a loss or they may be famously happy with the investment they have made and are quite happy to wait for the investment to reward. The point is that we don't know.

If you consider the share market to be a voting machine then those people who hold their shares have no vote. In CST's case that means that 95% of shares are disenfranchised from the "election". It's a bit analogous to having an Australian Federal election where you only get a vote if you are changing your vote from the previous election. Had that been the system then Tony Abbott would be the Prime Minister of Australia (by a huge margin).

Furthermore, even looking at those few shares that have been sold, we really don't know what their motivation for selling was. Sure, it may be that some have decided that they no longer believe in this investment. Others may just be sheep who have made a faulty (in my opinion) decision based upon a sagging share price. There may be others who retain their faith and belief in the Company but for personal reasons have been forced to sell some of their shares.

To try to draw some nexus between the trading volumes/prices and what the shareholders are thinking about the Company is just plain wrong.

The trading volumes and prices tell us nothing about the business and they tell us nothing about what the shareholders are thinking about the Company or the business.

Lab Rat

Contributor "Lab Rat" has posted a comment to my post on "Competition?". However, for some reason beyond me, the comment has not appeared on the blog.

It is such a good and useful post that I have reposted it here.

"I agree that the Xpert MTB/RIF test is not competitive with QFN-TB, but people can be forgiven for thinking otherwise when journalists and analysts write that it is. Also it is worth explaining why it is not competitive and I do so here briefly and basically.
If a person has an infectious disease they have pathogen (ie bacteria or virus) inside them. At the same time, their immune system will be fighting the pathogen using various mechanisms, divided most basically into the innate and adaptive responses. Adaptive responses are acquired during one’s lifetime and are highly specific for the various pathogens. They may be antibody and/or cell-mediated - the relative role of each varies between diseases.
The new Xpert test is designed to diagnose active TB by detecting the TB pathogen in a person (it does this by demonstrating the presence of TB bacterial DNA in a person’s sputum). QFN-TB, on the other hand, examines a person’s cell-mediated immune response to see if they have encountered the TB bacteria. It can be useful in both active and latent stages of the disease.
During latent TB, a patient does not have the bacteria in their sputum and therefore the Xpert method is unlikely to be informative (the NEJM study did not examine latent TB, but this conclusion is reasonable). The Xpert method cannot be performed on another sample type, such as blood, because the TB bacterium is not present in the blood of an infected individual. Without going into a long explanation, I can’t see how this DNA-based (ie molecular) method is likely to be useful for latent TB, certainly in the foreseeable future. Basically, it is a refined version of existing DNA tests for TB and other diseases, which though very useful, have limited applicability in certain infectious diseases - they are only reliable when performed on a certain sample type, are susceptible to contamination and rely on relatively sophisticated reagents and analysers. The NEJM article acknowledges various limitations of the Xpert method.
Even though QFN-TB is an indirect method of ‘diagnosis’ (the definition of diagnosis seems to vary, especially when TB is concerned. Some might say that if you have latent TB you can’t be diagnosed because you don’t have the full-blown disease and perhaps this is why misinformation regarding diagnostic TB methods is rife), it is still very useful. The diagnosis of many diseases relies on examination of a person’s acquired immunity to a large extent (eg, in HIV and hepatitis). In most cases, however, antibody-based immunity is examined, not least because cell-mediated immunity has been difficult to measure in the past. This is why the QFN technology is significant – it offers a way of measuring cell-mediated immunity and theoretically is applicable to a range of diseases, infectious and otherwise. The closest technology to it is ELISpot and it is much less easy to perform.
It is hard to see how the Xpert method will render the QFN-TB method redundant because of the need for latent TB testing. It is better to detect and treat infected individuals before they have TB bacteria in their sputum in order to halt the spread of disease (during latent TB the bacteria lurks in calcified regions of the lung). Also, one should not rule out the possibility that CST is working on a version of QFT-TB for the developing world that would coexist with the Xpert method. The Xpert method is the result of a public/private/charity collaboration and unlikely to be competitive in a cut-throat way.
I used to work for a biotech company that received much mainstream press coverage and it always was inaccurate, sometimes grossly so. Certainly, the New Yorker article on TB contains multiple inaccurate details.
BTW, please don’t base your financial decisions on anything I have written. I expect the topic of competition will come up at the AGM.
Lab rat "

Competition?

Just a quick one.


I see that the current "fear and loathing" being expressed in forums has led to a totally mistaken assumption about a new test for TB that has recently been announced by an American Company. 


I'm really not going to waste any time on this other than to point out that this is just another diagnostic for ACTIVE TB. It may or may not be better than the diagnostics for Active TB currently available but it has no direct relevance to us at all - QuantiFERON TB Gold from Cellestis is a diagnostic for LATENT TB.


It's really important to understand the difference. Any level of understanding would preclude the ludicrous suggestion that "maybe this new diagnostic can be modified to detect Latent TB".


Sorry for being so blunt but anybody that is willing to hold a speculative stock for multiple years must be willing to do the necessary work to really understand what they have invested in.

Reply to Elleburra

In response to my recent blog post, Elleburra made the following comments. I thought it was worthwhile developing that further as a blog entry.

"The directors in my view have done an excellent job of promoting the product to the target markets but appear at the same time to be very loath to promote the company to the investment community. We have to face the fact that very few investors even know of Cellestis let alone know the very exciting story developing.

After many years in investment banking I probably look at this from a different perspective to most. I often ask mtself what does the long term future hold for Cellestis? Hopefully it will be a very prosperous future, maybe even involve substantial aquisition/s or perhaps even there could be an attempt by a bidder, hostile or otherwise, to gain a substantial, controlling interest.

Will it at some stage need the broad based solid support of shareholders and the investment community as a whole to promote and bankroll a substantial aquisition or resist a takeover?
Looking at the continuing downtrend in the shareprice this support is presently lacking.

This is where the maketing of the company itself is important and in that respect I was very concerned to read the preamble in the Intelligent Investor article. If the I I version of events is correct the company did not even bother to return the analysts call. Cellestis appears to do very little towards establishing relationships with the financial press or the investment community as a whole."

The above develops the conversation in a thoughtful and meaningful direction.

You suggest that the Company have done a credible job of promoting the product to the target markets. This is, in my view, a major part of their job and I am happy to accept that contention. As I guess is very clear from my posts, it is the development of the business that I consider of utmost importance and it is this that I watch to assess (and maintain) my faith in the Company. I know that there are others that suggest that they should be more aggressive in this area (buy one get one free?) but those of us who have followed this story for many years and have developed an understanding of the marketplace that the Company is addressing understand that the approach that the Company have taken is most likely the correct one.

Now, to investor communications. Unlike others, it seems that you have thought about this a little more carefully and have not developed an argument along the lines of "The Directors should ramp the Company so that my shares are trading at a higher value on the Share Market".

I am happy to admit that your proposed justification for requiring more investor communications has made me think. In essence, you are suggesting that better investor communications will develop more investor loyalty and an attraction of substantial (institutional?) shareholders. You contend that both of these are required to protect the company from a hostile takeover and to raise additional funds if the Company decides to make a substantial acquisition.

Whilst this has merit, I don't actually think (and I have spent some time absorbing your suggestions) that it really works.

Re a takeover. Institutional investors are not necessarily loyal to the company in which they are invested. Generally they will take a path that leads to immediate (monetary) gratification. It is also worth pointing out that the Directors alone hold enough shares to prevent a takeover. The Directors shares plus the shares that I know are in safe hands amounts to some 50% of the Company. That is not to say that a takeover could not happen - it's just that there are enough holders with an understanding of the potential of the business to prevent a takeover at a silly price, regardless of what the Sharemarket may be saying at any point in time.

Re an acquisition. I assume that should the Company decide to make an acquisition then they will be able to fund it with cash and/or debt. If the acquisition was such that they did need to do a capital raising then it would be the Directors job at that time to convince the market of the validity of that decision. I doubt that any further consolidation of shares into institutional hands would really make a difference to the outcome here.

You make the suggestion that the current share price indicates a lack of investor loyalty to the Company. I am not sure that it can necessarily be read that way. There are actually a lot of loyal investors (I am one) that are having no real impact on the current shareprice because they are simply holding their shares. I just don't think that Share Price is a valid measure of investor loyalty. After all, the current share price is purely a result of the changing of hands of a single digit % of the Company. The remaining 90% plus remain held by "loyal" investors.

As to Intelligent Investor's suggestion that Tony Radford did not wish to speak to them, we can only take their word for that. The fact that they have somehow managed to get their nose put out of joint doesn't really mean anything to me at all.

Again, thanks for the thoughts. I enjoyed reading something "fresh".

The Gump Returns

G'day all,


As you may have noticed, I have been quiet for a while. I just felt that after ten years of continuous posting on Cellestis that I deserved some "Long Term Service Leave". A few weeks on a driving holiday through France and Italy has been most enjoyable - I may even post something about my experiences at some point. 


Whilst I haven't been posting anything during my break, I have (of course) been keeping up with Cellestis developments and forum postings with my whizz bang new Android smartphone.


There seems to be a lot of angst being expressed in the forums at the moment. I have some thoughts on that that I would like to share. However, just before I do, let me qualify the context, meaning and purpose of my comments. Many of my comments are totally contrary to those being made by other posters. The fact that I disagree with them should not be taken as to mean that I have any disrespect for those posters, their comments or their right to express an opinion. In fact many of the posters that I disagree with have earned my respect over long periods of time. We all have the right to have our own opinions. The fact that sometimes those opinions differ means nothing more than that we have developed different opinions. There are numerous reasons why our opinions can (and should) vary. 


In short, my following comments should not be interpreted as being an attack of any specific poster(s). They are simply my thoughts that have developed in response to the general angst that seems to have permeated much of the Cellestis investor community.


It seems that the main criticism being made against the Company (or more specifically, the Directors) is that they are not providing enough information, often enough. There are a number of aspects to this criticism that I will address.


We are all grown ups. We need to make our own decisions based upon our own interpretation of what is going on around us. It seems that some people want Tony Radford to visit their home each night, tuck them up into bed and whisper into their ear "things are going to be just fine". I'm pretty sure that is not going to happen (frankly the mental picture is just a bit spooky). Seriously, it has been our decision to invest in Cellestis. We did it because we want to make money by doing so. It is our responsibility and we cannot rely upon anybody else to make us feel better about our own decisions. Putting aside illegal, immoral or criminal activity (of which there is not even a scent) then the only person that we can blame if our investments do not meet our expectations is ourselves.


I have to wonder (but not for too long) what it is that has brought on this spurt of negativity from some investors. It's pretty obvious that it has been brought on by the current share price. It really seems that people sometimes lose sight of the business and are driven only by the share price. If the current share price was $5, with nothing different about the business, would people still be complaining? People are suggesting that the Directors should be out there promoting the stock to other investors. Why is that? The Share Price of Cellestis is essentially made up of two components, an intrinsic value (based on current earnings) plus a speculative premium. Now, you can calculate the intrinsic value in any way that you wish but let's say it's currently about one dollar. That means that if you buy the share today then you are paying about $1.30 speculative premium. That is, you have decided that the future prospects of the Company are good enough that you are willing to pay that much to buy those future prospects (absolutely nothing wrong with that). So, therefore people are saying that they want the Directors to increase that speculative premium by making some predictions about the future (that, incidentally, they can be accountable for). Why do you want the speculative premium to increase? So that somebody else will be willing to buy your speculative premium at a higher value than current. In fact, what you are asking is for the Directors to push the speculative premium above the value that you believe it is worth, so that you can sell your shares on to somebody else and you can bank a nice profit. 


That just doesn't make sense to me. If the Directors came out next week and made categorical statements about next year's profits then it is up to you, and only you, to decide whether you want to hold, buy or sell the shares. To buy or sell you will need to meet the market. If you are planning to sell then you are hoping that the market will have greater faith in the future of the Company than you do. If you don't have faith in the Company then why are you holding the shares? 


What if the Directors make a prediction about next year's profits that turns out to be wrong? Then you would be pissed off!


Personally, what I want for the future is for the Company to continue progressing so that the speculative premium that I have paid becomes converted to intrinsic value. That will mean that I will be receiving bigger dividends and should the situation ever arise that I decide to sell some of my Cellestis shares I will receive what I consider a fair price for them. 


I don't think that there is any validity in criticising the Directors for not promoting the stock - that is not their job. Their job is to run the business in our best interests. If people have any concerns with the way that the Directors/Management are running the business then that is what they should be discussing.


Another way of looking at it. Aren't you saying something like "CST is worth more than the current Share Price. If only the Directors would shout it from the rooftops then everybody would know this". Well, if that is what you believe then surely you should buy as many CST shares as you can afford? The definition of a great buy is when the market undervalues a share. Eventually, the market will get it right (maybe just for a moment).


If you think it is "fair" that the Directors should let people know when the market has undervalued a share then shouldn't they also do this when the market overvalues a share. How would shareholders react if the Directors of a Company came out and said "We think the shares are not worth as much as the market is saying". 


Again, it is we the market participants, who determine the share price. It is up to the Directors to run the business in the best way possible and to ensure that everybody has access to the same information about the company.


Okay, let's look at it from a slightly different perspective. I note that several people have expressed the desire that the Company release sales figures every 3 months. I have no real objection to that but I don't actually see it as being of any benefit to us. There may be some good reasons why they are not doing this - it has been suggested that the "lumpy" characteristic of CST sales patterns may create incorrect impressions. Whether that, or any other reason, is true is immaterial. Look at it in simple terms. If the Company released astoundingly good figures for a quarter, how would that benefit you? You would assume that the share price would go up. What will you do? Sell? Why would you sell? After all, surely your long term faith is being rewarded. A similar scenario can be painted for the reverse.


It often seems to me that people are looking for "the bigger fool" to offload an investment that they decided to make and are no longer happy with. Not only that, they want the Directors to encourage this "bigger fool" to buy their shares. That's just plain silly. The Company does not benefit from that action, the Directors do not benefit, the existing shareholders do not benefit and the purchaser does not benefit. The only person that benefits is you - the seller. The share market is not there to unconditionally make you rich - it is there to allow people to make investments in Companies based upon their own opinions, regardless as to how they came to them.


In the end, even if they wanted to, I doubt that the Directors can make any firm prediction about next year's profits. I am quite content with the information that the Company currently provides in it's annual and half year reports and investor briefings. Augmented with my own research and that performed by others (a special thanks to Roger) this is enough for me to make my own well judged decision about my investment in Cellestis. Not that it is relevant to you but I have actually purchased more CST shares recently.


Note that all my comments are made from the perspective of an investor. Traders are big boys and girls - they can look after themselves.