I note that my previous post regarding the upcoming dividend has stimulated some interesting conversations "around the traps".
It could be that my post has been misinterpreted by some as a mild complaint about the dividend policy of Cellestis. It is not. I believe that the dividend policy of Cellestis to date has been both reasonable and sensible - it has provided investors with a taste of the rewards to come while ensuring the ongoing strength of the Company balance sheet.
What I have tried to do is to approach the matter of the dividend policy of Cellestis, "going forward :)", in a dispassionate and logical manner. Hopefully, my logic, accounting and understanding of financial and investing matters is reasonable enough that my conclusions are realistic.
In the end, I guess I am making a statement about what I believe will happen. I believe that the Company will either increase the dividend payout percentage or they will tell us why they haven't done so. Of course I have no more knowledge regarding this than any other pundit, it is just that there is no reason to believe that the Company won't do this.
Just for interest, if we were to assume a NPAT of $10m for the year and a dividend of 5c for the half then we would have an annualised current PE of around 27 and an annualised dividend return of 3.7% which grosses up to 5.8% - not too bad at all, given the growth prospects of Cellestis.
One other non-consequential little matter. I have received a number of communications from people pointing out that my previous post on dividends has been reposted in another place. That was done with my permission. It was my suggestion that the post not be accredited to me, only because that particular forum has a policy that precludes that. As I have always said, I maintain no copyright over anything that I say - if anybody finds any of it of interest then I am quite happy for it to be reposted anywhere.
Wednesday, July 28, 2010
Tuesday, July 27, 2010
Dividends.
The entries so far in my guessing competition (thanks for the entries and comments so far) has started me thinking about the upcoming dividend.
We know that Cellestis had around $20m in cash as at 31st December 2009. The CEO of Cellestis has previously indicated that something around $20m is an adequate cash holding for the company.
Why do companies hold back some of their cash profits into a cash reserve?
We know that Cellestis had around $20m in cash as at 31st December 2009. The CEO of Cellestis has previously indicated that something around $20m is an adequate cash holding for the company.
Why do companies hold back some of their cash profits into a cash reserve?
- as a buffer against temporary future misfortunes
- to cover the cycle of operating cash requirements (inventory, salaries etc)
- to reinvest cash back into the business (purchase/build physical assets, R&D etc etc)
- to build a war chest for potential corporate action (takeovers)
Let's look at these reasons as they relate to Cellestis.
It is fairly unlikely that there is any severe future misfortune that a cash reserve could solve. Let's think of the worst possible misfortune. How about if somebody released a competing diagnostic that is better, cheaper and faster? (it's not going to happen). In reality, no practical amount of cash on hand would save Cellestis in that situation.
It seems that the $20m cash on hand is more than adequate to cover the cycle of operating cash requirements - even if massively increased sales demand an increase in inventory purchases. A modest increase in cash over time, in proportion to sales growth, to maintain this cover may well be justified.
Cellestis' R&D is a relatively low cost item that can easily be financed from ongoing cash flows. It is unlikely that Cellestis is about to build a factory, buy a chrome and glass edifice to somebody's ego or anything similar. The management have demonstrated a commitment to modest and sensible use of capital - there is no reason to expect that this will not continue.
Takeover. There is nothing that we know of on the horizon. It is simply not sensible to hold back large amounts of cash profits on the "off-chance" that a suitable takeover may appear. Cellestis does not really need to get involved in a takeover at this point. Maybe at some future time it will become a useful action - at that time a takeover can be financed by the cashflow at that time and debt. There is no need to husband cash for that eventuality.
We could expand on all of those points quite extensively. However, the basic point is clearly evident - Cellestis would need a justification for increasing its cash holdings. Now, there may be some great justifications. If there are, then we would expect and be entitled to have those justifications explained to us in the upcoming accounts.
Looking at it the other way round - I can see no reason why the Company would NOT increase it's dividend payout ratio significantly from the current 45%.
Now, I don't know what the NPAT figure for 2010 FY will be. Just for this exercise, let's guess that it is $10m. Given that we have already received 1.5c dividend this year then I can see no reason why the dividend for the second half should not be 5c or 6c - giving a dividend payout ratio of 65% or 75% (annualised) or 71% to 85% (on a current half basis).
We can look at this from another angle. In general, the Cellestis share registry is predominately populated with investors, rather than traders. In a pure sense, investors achieve a return on their investment through the receipt of their fair share of the profits that are made by their company - not by selling their shares. The investors in Cellestis have been wise (or lucky) - we have invested in a startup biotech that has succeeded in reaching profitability. It is only reasonable that we, the investors, should now start receiving a return on our investment (without selling the investment that we have made).
Anybody else have thoughts on this?
Saturday, July 24, 2010
Your Guess is as good as Mine.
G'day,
Have you missed me? I've been away on a short break. Back now and all revived ready for the Cellestis 2010 FY figures.
I've had a few emails asking "Where is the guessing competition this year?". Okay, here it is.
Cellestis 2010 FY Guessing Competition.
As usual, there is no entry fee and no prize - other than the abundance of accolades from your peers.
Check the results here.
Have you missed me? I've been away on a short break. Back now and all revived ready for the Cellestis 2010 FY figures.
I've had a few emails asking "Where is the guessing competition this year?". Okay, here it is.
Cellestis 2010 FY Guessing Competition.
As usual, there is no entry fee and no prize - other than the abundance of accolades from your peers.
Check the results here.
Tuesday, July 13, 2010
$AU7.95 Investment.
Following on from my post on AFR Smart Investor and its mention of Cellestis as one of 25 small cap bargains, I made the $7.95 investment in purchasing the magazine.
The actual mention of each company (including Cellestis) is relatively small.
It seems that the reason that they got the description of the Cellestis business slightly incorrect (treatment instead of diagnosis) is that the article was produced in conjunction with Lincoln Indicators. We all know that Lincoln Indicators have Cellestis listed as a "Star Stock" but also that they have the same error in their business description.
The text of the article itself is quite interesting in that it describes the things that we should be looking for in an investment like this. Cellestis ticks all their boxes very nicely. It's certainly a worthwhile read.
The actual mention of each company (including Cellestis) is relatively small.
It seems that the reason that they got the description of the Cellestis business slightly incorrect (treatment instead of diagnosis) is that the article was produced in conjunction with Lincoln Indicators. We all know that Lincoln Indicators have Cellestis listed as a "Star Stock" but also that they have the same error in their business description.
The text of the article itself is quite interesting in that it describes the things that we should be looking for in an investment like this. Cellestis ticks all their boxes very nicely. It's certainly a worthwhile read.
Sunday, July 11, 2010
The Very First Senior Moment.
I promise not to fill my blog with internet jokes. After all we all have friends that send us more than enough jokes - don't we? However, as I gently age, this one struck my funny bone.
How Dinosaurs became extinct
The very first "senior moment"
Wednesday, July 7, 2010
Sunday, July 4, 2010
Cellestis One Page Summary (OPS)
Those of you who have been reading my scribblings for some time may remember that a few years back I published a document entitled "CST One Page Summary (OPS)".
I have now attempted to bring that document up to date and present it here.
This document is not intended to be the be all and end all of an analysis of the Cellestis investment. It is really just intended as an introduction to the essence of this investment. Clearly nobody would make an investment decision based upon this but it may provide a good starting point for somebody that has not previously been aware of this company.
As always, feel free to copy, repost, distribute or bin as you see fit.
One Page Summary
I have now attempted to bring that document up to date and present it here.
This document is not intended to be the be all and end all of an analysis of the Cellestis investment. It is really just intended as an introduction to the essence of this investment. Clearly nobody would make an investment decision based upon this but it may provide a good starting point for somebody that has not previously been aware of this company.
As always, feel free to copy, repost, distribute or bin as you see fit.
One Page Summary
Telstra (ASX:TLS) A Good Investment?
Now, I'm no Telecommunications analyst but that hasn't stopped me from thinking a lot about Telstra.
I must admit that there have been times when I have thought "Why am I invested in this Company that is so much at the behest of Political events". However with some sort of resolution of the political situation the stress of that thought is largely removed for me. Either the NBN is going ahead with a re-elected Labor Government under a deal that Telstra has negotiated or the NBN will be cancelled/modified under a newly elected Liberal Government. Neither of those outcomes will provide any further negativity for Telstra. I'm going to assume the first outcome (the second outcome may be marginally "better" for Telstra).
If we dissociate from our personal views on whether the NBN is a good or bad thing and, furthermore put aside our own personal views as customers of Telstra ("I hate Telstra because they took 3 days to fix my phone") then we might have a chance of seeing through to Telstra as an investment.
Let's cut to the chase. Telstra is currently paying an annual dividend of 28c. On a share price of $3.20, that is a dividend yield of 8.75%. That is a fully franked dividend so it grosses up to a yield of 12.5%. Nobody can argue that that is not a great return on our investment.
Clearly, the question is "How long can it keep this dividend up?". Purely the fact that the yield is so high (ie the Share Price is so low) could be read as the Market feeling that this dividend stream will not last for long. I think that the market has it wrong.
Under the NBN Telstra eventually decommissions its copper network and utilizes the NBN to provide services to its customers. Clearly Telstra loses the income that it was making on those copper lines but receives compensation for that from the Government. I can only assume that after the long and hard bargaining that was conducted (and the political imperative of the Government to lock in a deal at a particular point in time), Telstra achieved a deal that they felt would be reasonable for their future (otherwise they would not have done the deal). So, in many ways, Telstra becomes one of many Telecommunications providers in the Australian market. As is always the case in this type of situation their job will be to achieve and hold a significant market share by differentiating themselves. I firmly believe that the pie will grow over coming years.
The NBN is going to take several (eight?) years to fully implement. Over that time Telstra will continue to generate (reducing) revenue from their copper infrastructure. Furthermore, their capital costs of upgrading and maintaining the copper will reduce. I would imagine that much new infrastructure that perhaps would have been built will now not be built (why build something that is going to be superseded in a few short years). The capital that would have been spent on this can now be redirected to other longer term profit generating projects. It's an interesting formula but it seems to me that Telstra have several years of the continuation of huge cash flows ahead, during which time they can reshape the Company for the long term.
The removal of the Universal Service Obligation (USO) from Telstra is significant. It happens essentially immediately and removes one of the significant imposts upon Telstra. I believe that that was a very important part of the deal that was done with the Government. There should be a significant expense saving here that takes place virtually immediately.
Telstra have the best wireless network in Australia. Under the deal they will now be able to bid for 4G spectrum to maintain their leadership here. The world is changing. We are now at the point of simply expecting that we can access our internet anywhere, anytime on any device that we choose - the iPad and similar devices will add enormously to this growth. Furthermore, we have become quite accepting of the fact that we pay a premium (over fixed services) for this service. I believe that this will be a big driver of future profits for Telstra. This will no doubt be an area of large capital investment by Telstra.
Under the deal Telstra now get to keep their Foxtel.
The weak horse in the stable is probably Sensis.
In the end, I believe that the reshaped Telstra has every chance of reshaping itself into a leaner and cleaner organization that will continue to generate great profits long into the future. I don't see the dividends being cut. I'm happy with a grossed up yield of 12.5% (who wouldn't be?).
Of course I could be wrong. Telstra could stumble, they might cut their dividend and their share price might fall. That could happen to any company. Our job as investors is to make our own decisions about where we risk our money (there is always risk).
A yield of 12.5% gives me a big moat.
What thinks you?
I must admit that there have been times when I have thought "Why am I invested in this Company that is so much at the behest of Political events". However with some sort of resolution of the political situation the stress of that thought is largely removed for me. Either the NBN is going ahead with a re-elected Labor Government under a deal that Telstra has negotiated or the NBN will be cancelled/modified under a newly elected Liberal Government. Neither of those outcomes will provide any further negativity for Telstra. I'm going to assume the first outcome (the second outcome may be marginally "better" for Telstra).
If we dissociate from our personal views on whether the NBN is a good or bad thing and, furthermore put aside our own personal views as customers of Telstra ("I hate Telstra because they took 3 days to fix my phone") then we might have a chance of seeing through to Telstra as an investment.
Let's cut to the chase. Telstra is currently paying an annual dividend of 28c. On a share price of $3.20, that is a dividend yield of 8.75%. That is a fully franked dividend so it grosses up to a yield of 12.5%. Nobody can argue that that is not a great return on our investment.
Clearly, the question is "How long can it keep this dividend up?". Purely the fact that the yield is so high (ie the Share Price is so low) could be read as the Market feeling that this dividend stream will not last for long. I think that the market has it wrong.
Under the NBN Telstra eventually decommissions its copper network and utilizes the NBN to provide services to its customers. Clearly Telstra loses the income that it was making on those copper lines but receives compensation for that from the Government. I can only assume that after the long and hard bargaining that was conducted (and the political imperative of the Government to lock in a deal at a particular point in time), Telstra achieved a deal that they felt would be reasonable for their future (otherwise they would not have done the deal). So, in many ways, Telstra becomes one of many Telecommunications providers in the Australian market. As is always the case in this type of situation their job will be to achieve and hold a significant market share by differentiating themselves. I firmly believe that the pie will grow over coming years.
The NBN is going to take several (eight?) years to fully implement. Over that time Telstra will continue to generate (reducing) revenue from their copper infrastructure. Furthermore, their capital costs of upgrading and maintaining the copper will reduce. I would imagine that much new infrastructure that perhaps would have been built will now not be built (why build something that is going to be superseded in a few short years). The capital that would have been spent on this can now be redirected to other longer term profit generating projects. It's an interesting formula but it seems to me that Telstra have several years of the continuation of huge cash flows ahead, during which time they can reshape the Company for the long term.
The removal of the Universal Service Obligation (USO) from Telstra is significant. It happens essentially immediately and removes one of the significant imposts upon Telstra. I believe that that was a very important part of the deal that was done with the Government. There should be a significant expense saving here that takes place virtually immediately.
Telstra have the best wireless network in Australia. Under the deal they will now be able to bid for 4G spectrum to maintain their leadership here. The world is changing. We are now at the point of simply expecting that we can access our internet anywhere, anytime on any device that we choose - the iPad and similar devices will add enormously to this growth. Furthermore, we have become quite accepting of the fact that we pay a premium (over fixed services) for this service. I believe that this will be a big driver of future profits for Telstra. This will no doubt be an area of large capital investment by Telstra.
Under the deal Telstra now get to keep their Foxtel.
The weak horse in the stable is probably Sensis.
In the end, I believe that the reshaped Telstra has every chance of reshaping itself into a leaner and cleaner organization that will continue to generate great profits long into the future. I don't see the dividends being cut. I'm happy with a grossed up yield of 12.5% (who wouldn't be?).
Of course I could be wrong. Telstra could stumble, they might cut their dividend and their share price might fall. That could happen to any company. Our job as investors is to make our own decisions about where we risk our money (there is always risk).
A yield of 12.5% gives me a big moat.
What thinks you?
Thursday, July 1, 2010
Inmates Legal Action - Brunswick, NC
It is interesting to note that another set of legal cases are about to be launched by inmates in the US (Brunswick County, NC).
Article here.
We would all be aware that the threat of legal liability can be a driver of change. However, the following paragraph started me thinking about this from a slightly different angle.
Article here.
We would all be aware that the threat of legal liability can be a driver of change. However, the following paragraph started me thinking about this from a slightly different angle.
"The health department required those who tested positive, either with contagious or non-contagious forms of the disease, to take medication for several months to keep the potentially deadly illness under control and from spreading in the community."That requirement is quite a big burden in a jail. It means that resources must be used to provide and monitor the daily treatment of any inmate that has been diagnosed with Latent TB (as well as Active TB). In a jail, I would imagine that this would be a significant cost - perhaps more than the equivalent in the wider community. This cost could be reduced by treating only those that truly have TB - not those that are reported as false positives by the TST. That (and all the other advantages of QuantiFERON-TB Gold over the TST) should be a further driver towards the adoption of QTF in this setting.
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