A Shaw Thing*

Well, with Valentines day approaching I guess we all look forward to a little lovin'. Shaw Stockbroking have come to the party. 


As many of us would know, Shaw have been interested observers of CST for many years but have not published any official coverage. Finally, they have now initiated coverage of Cellestis.


With their kind permission I am able to pass on their Broker Report.


There is much to absorb and possibly discuss about this report but I will just make a couple of salient points here.


Firstly, this is an extremely well put together report and clearly reflects the long term interest of the broker in Cellestis. I am particularly impressed that they have been very conservative with their projections. On the other hand they also point out that it is quite likely that the Company will perform much better than these projections. 


Projections are just that - a projection based upon known facts and opinion. Personally, some of my opinions are at variance with theirs (but that does not detract from the value of this report).


I note that they have maintained the dividend payout ratio at around 60%. The problem with that is that by 2018 this means that the Company would have more than $200m cash on hand. I suspect that at some point the Company will increase the dividend payout ratio. Of course the alternative is that they use the $200m to make an acquisition. They have previously said that any such acquisition would be earnings accretive. 


I note that the Shaw DCF Valuation has been done without a terminal value in 2023. I understand why they have done this - the current patents expire then. Of course between now and then we would expect much to change about our Company anyway. It is also worth pointing out that, based on the Shaw figures, the Company would have something like $350m in the bank at that time - that alone is a terminal value. A quick and dirty calculation tells me that $350m in 2023 has a net present value of around $100m ($1 per share).


I am also a little curious as to why they have used a discount rate of 12.2%. I would normally use a lower figure (I have explained my reasoning in previous posts). That would result in an increase in the DCF valuation.


Anyway, don't read any of the above as a criticism, just a difference of opinion. 


Enjoy the read.




*Apologies for the title. It's Roger's bad influence.