I can see clearly now.

I suspect that, for most of us, if we are able to cast our minds back to when we very first embarked upon our adventures in the share market and, furthermore, if we are able to be totally honest with ourselves, we probably approached the market with a thought something along the lines of "All I have to do is buy shares and then sell them for more than I bought them for and I have made a profit - all good".


I am pretty sure that we would now look back on such a position of being one of naivety. We know that it is certainly not as easy as such a view implies and regardless of where we find ourselves today, would now realize that there is so much more to it.


I believe that, broadly, between us we would have ultimately found ourselves in one of three groups.

• Those who lost enough money to become discouraged with the whole "game" and moved on to other ventures. (The people in this group are probably not reading this blog).
• Those who found that they are in that very small group of people who have developed the skills, perseverance and tools to consistently make profits by buying and selling stocks (ie trading).
• Those who ultimately took a different path and became stock market investors. Just like the traders above, they developed the necessary skills to become investors.

As I say, the first of the above groups are unlikely to be reading this blog. I have seen figures that indicate that a distressingly high percentage of people "burn out" in this way - often within 12 months. It is interesting to consider what happened to their money - clearly the majority of it has gone to those in the second two groups above.

I am not a trader. There are a number of reasons for this - most of which would be tedious and boring (and probably boorish) for me to go into here. I offer no criticism of traders - if it works for you then all's well. I can't really offer you anything of value.

I consider myself to be in the third group - an investor. My apprenticeship (of multiple decades) is far from over. I suspect that in my dotage I will still be able to enjoy the thrill of an "Aha!" moment or two. 

I have seen many attempts to define "an investor" (usually done as a comparison to "a trader"). I don't think there is any one definition that can clearly define all of us who consider ourselves to be investors. Maybe that is as it should be - after all it is what we think of ourselves that counts in the end (in this and all things). However, if pressed, my definition of an investor (or at least me) is somebody who is interested in becoming a part owner of a business with the ultimate aim of receiving the financial returns that the business makes (this is important and hopefully will become a little clearer later in this article). That does not mean that I do not sell the businesses that I have bought - it just defines the reason why I bought the business. There are multiple reasons for selling a business, including; the business no longer is a good business in the investors' eyes; somebody is willing to pay a substantial amount more than the investor believes the business is worth; a better investment comes along; personal financial reasons; and so on. Certainly, the length of time that a stock is held does not make the differentiation between trader and investor. There is probably no reason why a trader could not hold a stock for several years and there is no reason why an investor might not sell an investment after one day.

The rest of this article is purely about investing in the stock market. (Traders may leave now, if they wish, and draw another chart)

After due consideration and much thought I have now managed to reduce the investing process down to two (yes, just two) simple steps. Basically, they are just two questions that need to be asked and answered.

1. Is this a good business?
2. Can I buy the business at a price that makes financial sense for me? (note the bolding of me - hopefully I will remember to address the importance of that later on).

Now, the above may seem trite at first glance. However, it is my hope that I can flesh that process out enough that you might even consider writing them on a piece of paper and tacking it to the wall above your desk. 

I should also say that none of this is revolutionary, new or even startling. It is, in fact, just the distillation of the knowledge that the greats such as Warren Buffett, Charlie Munger, Philip Lynch, Roger Montgomery and many others have been trying to push into my head over a number of years. Perhaps Roger Montgomery may be slightly embarrassed to be included in this list but I have included him specifically because he has demonstrated in his book "Value.Able" an ability to think clearly and better still, to explain his thinking and knowledge in an understandable and resonant manner. I don't agree 100% with everything he has to say but I would highly recommend his book to anybody that wants to really think seriously about the investment process. I hope to find the time to write a review of his book at some future time.

Back to the two step investing process. 

Is this a good business?

I do not plan, here, to tell you what makes a good business. The important thing - and this is probably the most important thing in this entire article - is that any determination of whether a business is "good" must not in any way include any examination of the listed stock of the company on the stock market. It is absolutely essential that we have a clear and unambiguous distinction between the business and the representation of the company on the stock market. If I could say this 100 times I would. If I could come around and shout it in your ear, I would. I even feel inadequate that I am unable to find the words and explanations that would make this resonate with you. Hopefully, one day, I will find the right words to convey this basic tenet. In the meantime, allow me to make some observations, some of which, hopefully will resonate with you.

The basic descriptors of a business' financial affairs are the Profit and Loss and Balance Sheet. Have a look at them. Is the Share price represented in them in any way? No, it isn't. Movements in the Share Price have absolutely no impact on the finances of the business. Therefore, movements in Share Price do not change the value of the business one little bit. 

The shares that are listed on the share market do not belong in any way to the Company. Listing a company on the share market is essentially a "one-time" operation. The shares are sold into a third party market (the share market) and from that point on the Company has nothing more to do with that third party market. The shares will change hands within that market at a variety of prices over time - this has nothing to do with the Company. It is entirely discrete from the business and from the point of view of operating the business in the best possible way should, ideally, have no impact. (In fact, a business that spends large amounts of it's time and resources in performing actions that are wholly designed to impact the share price, instead of running the business in the best possible way, may well be validly excluded from our category of "good" businesses.)

So, in assessing whether a business is a good one we must avoid looking at anything that is derived from the Share Price. We should not be interested in the current Share price, the historical Share Price, the price chart, Price/Earnings Ratio, Yield, "expert" price projections etc etc. It's not as hard as it sounds - it becomes second nature after a short while. In the meantime, just ask the question - "Does what I am looking at change when the Share Price changes?". If the answer is "Yes" then do not let it impact your consideration of whether this is a good business.

We can look at all of this from a slightly different perspective. Our aim should be to be smarter than "the market". That is, we want to back our view against the view of the market. As soon as we include the market view (ie the Share Price) in our calculation of the value of a business then we are accepting the view of the market as part of our considerations. It makes no sense to put the market view on both sides of the equation My View Vs Their View.

As I said, I am not planning, in this article, to tell you how to identify a "good" business. It is a big thing to discuss. There are many different ways of doing this and many different factors to consider and weight. I hope to address that in more detail in future articles. In the meantime, I can offer no better advice than that of Warren Buffett - ask yourself the question "Would I be happy to own this entire business". Once again, a statement that is easy to dismiss as trite, however, the exercise of visualizing yourself as the owner of the business goes a long way towards approaching your assessment with a clear head. (It also assists with that important task of dissociating the business from the Share Market in your mind).

One final observation that goes some way towards linking the above with the second question that follows. A crap business is still a crap business, regardless of the price that you can buy it for. That is, if the business does not meet your definition of a good business then your should not be interested in investing in it. The following question need not be asked. Move on. There are plenty of good businesses available - keep looking.

Can I buy the business at a price that makes financial sense for me?

Once you have identified a good business then all that remains is to find out whether you can buy it at a price that makes financial sense for you. Now (finally!) you can log on to your broker and have a look at the share price.

Again, the purpose of this article is not to take you through the process of deterministically answering that question. It is actually a fun topic and one that I want to address in a future article (I promise). However, here, we can look at this in general terms.

Let's not lose sight of our central aim of investing in the companies listed on the share market. It is to make money. It is to make more money than we could make by using our money in other ways that we might choose. As such we clearly need to identify how the investment is going to financially reward us and when. Our rewards (I'll stop saying financial rewards from here on) may come to us as our share of profits being paid to us (dividends) or through the value of the company increasing to the extent that we can find somebody to buy some or all of our shares at a price that it makes sense for us to sell them at. Most likely it will come as a combination of both. Of course one of our basic beliefs (that I have not explicitly expressed but have implied) is that the market often "gets it wrong". That error can be either way. It may mean that an increased value of the Company may not become reflected in the Share Price for a long time. It may also mean that there are times when the market is willing to pay more for the Company than what we consider the true value. Both actions of our investment, buying and selling, need to be made with those considerations in mind. Personally, my preference is to buy a company that will reward me excellently through the payment of dividends, forever. I've forgotten where the "Sell" button on my brokers' screen is. (My "other" two step investment strategy is: "Buy good shares; Lie on the beach")

Of course we now look at Yield, PE and so on. These tell us about the actual returns in our hand from the investment that we might make. Again, the purpose of this article is not to drag you through these (quite simple, in the end) calculations. If you can't wait for me to get around to doing that via my rather haphazard approach to this blog (you don't pay me enough to be anything else) then there are many other resources that will take you down that road.

I highlighted the me in the question that we are examining. i.e. Can I buy the business at a price that makes financial sense for me? The simple point that I am trying to make here is that the method and timing of returns from an investment suit each of us differently. An exaggerated example demonstrates this. 

A Company that requires that a significant proportion of it's profits for some time to come be reinvested back into the business with a promise of outsize returns some time in the future may be quite acceptable to a younger person who has a living income from wages. On the other hand, a retiree who is dependant upon receiving regular income in the form of dividends to be able to support their lifestyle would probably not find that to be an appropriate investment. 

There are many variations and nuances that make the investment considerations of each of us quite different. Each potential investment is quite different for each of us. I firmly believe that there is such a thing as a valid speculative investment. Often I see the speculative investment disparaged and somehow confused with a trading methodology. This is wrong. A speculative investment can be assessed via the very same investment process that I have outlined here. For the individual, any speculative investment may or may not make financial sense, depending upon the individuals' personal circumstances. This is no different from a "non-speculative" investment (if such a distinction can be clearly made). Of course we could very easily drift into a discussion of risk and risk/reward - topics that are often completely misunderstood (even by those who purport superior knowledge). I have some quite strong views on this topic that, once again, will have to wait for another time.

As always, comments welcome.

Press.

The following article was published in the Herald-Sun (Victoria) yesterday.

Now, I have no idea why an article quoting figures from the December half year should be published now, just days before the full year results are to be published. However, it's a nice item.


A salient point that is made by Dr Radford is one that I have bashed on about many times over the years and is one of the significant reasons that I am invested in this business. He very clearly defines the business strategy of the listed company - it is to fully realize the commercial potential of the QuantiFERON diagnostic. He is very firm about not taking the path that nearly all other Australian biotechs take - selling off the farm early in the process and thereby foregoing much of the financial benefit to be derived from the discovery. I am much heartened to hear "from the horses mouth" that this belief and strategy is still in place. I like being invested in a Company that recognises that the shareholders deserve financial rewards for their investment, faith and perseverance.


The QuantiFERON product is 100% owned by our Company - we are not dependant upon receiving crumbs from the table (royalties) from a giant pharma. The risk has been ours and now the profits are ours.


This has been achieved without a massive dilution of our equity by the all too common massive capital raisings that plague other startup biotechs.


And, to top it off, we have no debt.


One final point. Until now I had always recognised Rog as the master of article titles. I now suggest that Rog should bow at the altar of the author of this article. The title "Fully rad approach to TB" deserves a place of honour in the gallery of headlines. 

Forrest gets phished.

Apparently, Google in China was hacked overnight. The effect of this was that at some point when I went to read my gmails, I was prompted to re-enter my password (google does this from time to time legitimately). Of course it was a hacked page and it allowed somebody in China to get my gmail password.


Once they had it they then send some rubbish email about a cheap Apple computer to all of my contacts (not to my blog subscription list). 


At the same time they deleted my last few days emails and deleted my contacts list. Consequently, it is a little difficult for me to apologize directly to my contacts. I know that many of my friends read this blog so the easiest way to apologize is to do so here. My apologies for the inconvenience.


Of course I have now changed my password so all is okay. I'm just embarrassed to have fallen for a phishing attack.

Franking Credits.

This discussion follows on from our earlier discussions about dividends.

The Company have previously stated that it is their intention to pay fully franked dividends. Now, we don't know if they will continue that policy into the future. There may come a time where the level of foreign profits are such that it is not practical to continue to limit the dividend to that which can be fully franked. However, just for the moment, maybe we can assume that this policy remains in place. We might even go further out on a limb and project that the Company sees no benefit in accumulating large amounts of franking credits and therefore may well pay a dividend that exactly matches that which can be fully franked.

Given the above, I thought it would be interesting to try to establish exactly what the franking credit situation may be at the moment. It actually turns out to be quite hard to do - not the least because franking credits are accumulated on a cash basis.

A couple of basic facts.

Franked Dividend. A franked dividend is simply a dividend that the company has already paid the Australian Income Tax on. A fully franked dividend will have had tax paid at the 30% Company tax rate. Companies do not have to pay fully franked dividends, they may pay unfranked or partially franked dividends. The Australian Taxation Office (ATO) will give us (the dividend recipient) a credit on our tax for the tax that has already been paid on the dividend. For simplicity, I will restrict this discussion to fully franked dividends. It is easiest to understand by an example. If we receive a $.70c fully franked dividend then we will receive a tax credit of 30c. That is because the company would have needed to earn and pay tax on $1.00 to produce a post tax amount of $.70. In essence, when we do our own tax, we record an income of the dividend plus the franking credit ($1.00) and then subtract 30c from our final tax amount to be paid. Thus, if our marginal tax rate is 30% then we will have effectively no tax to pay on the cash dividend received. If our marginal tax rate is higher than 30% then we end up paying the difference between our tax rate and the 30%. If our marginal tax rate is less than 30% then we end up with a credit that will be offset against any other income tax that we have to pay - or if there is none then we receive a nice cheque from the ATO. The best situation is that when we hold the shares in a Superannuation account that is in pension mode. There is no tax to pay and the entire franking credit (30c) is paid to us by the ATO.

Often, it is easiest to examine our dividends as a "grossed up" amount. In the example above (a fully franked dividend), the grossed up dividend is the cash dividend divided by 7 and multiplied by 10 (therefore a 70c ff dividend grosses up to $1.00). This is convenient as it allows us to compare the yield directly with the yield that we might get from alternate investments (eg Bank Deposit, Bond). It is very common to apply the same methodology to dividend yield %. That is, a dividend yield of 7% ff grosses up to 10%. The current Telstra dividend yield, for example, is 8.5% ff which grosses up to a touch over 12% (hint, hint).

Foreign Tax. For companies that earn some of their income through overseas subsidiaries there is another little complexity. Such subsidiaries will likely have to pay tax in the country in which the subsidiary operates. (Generally) Any tax paid overseas will be allowed as a credit by the ATO against the tax that would be paid in Australia. However, such tax will not provide any franking credits. In a "worst case" situation this means that a company that earns all of its income overseas may not earn any franking credits and will not be able to pay franked dividends. More usually, the Company will pay some tax overseas and some in Australia. This means that not all of the earnings of the company can be paid out as fully franked dividends. Either the company will pay only as much dividend as they have franking credits available to make the dividend fully franked, or they will pay unfranked or partially franked dividends.

Cellestis have expressed a desire to pay fully franked dividends. Whilst most of our sales are made overseas, we are in the fortunate situation of having an essential part of the manufacturing process in Australia. This means that a judicious setting of the price that we charge our overseas subsidiaries for the product enables a respectable amount of the profits to be booked in Australia where they will be taxed by the ATO and thereby attract franking credits. The fact that we have extensive expenses (Sales and Marketing) based overseas helps with this also.

I'm guessing that you knew all that.

Now, to specifics. It would be interesting if we can establish what the tax situation of Cellestis is, particularly how much tax they are paying in Australia to provide franking credits.

As I mentioned above, it is actually quite difficult to reconcile the franking credits account - largely due to the fact that it is run on a cash basis. However, if we look at the 2009 Annual Report we find this.

This tells us that in 2009, 93% of the company earnings were recorded in Australia. Consequently, we would have to presume that the vast majority of the income tax paid has been paid in Australia and will therefore have attracted franking credits. This would imply that there is absolutely no reason that the Company could not pay a very high percentage of earnings as fully franked credits, if the Company so wishes.

Now, the reason that such a high percentage of the profits were booked in Australia is due to two factors; firstly that a very high part of operating expenses are incurred overseas; and secondly that a large amount of the profit is recorded because of the price that the Australian operation is able to charge its foreign operations for the supply of product. It would follow that, whilst the second factor should remain reasonably constant in the future, the overseas expenses as a proportion of actual sales will reduce. Ultimately it will mean that the 93% will progressively reduce but not by enough to reduce the ability of the company to pay large fully franked dividends.

It is worthwhile noting that retaining franking credits in the Company provides no real benefit to anyone. I do note that it would appear that the 1.5c ff dividend paid for 2010H1 would not have used up all of the franking credits available. I can only guess as to why the Company might have decided to limit the dividend in that case. It may be that it was felt at that point that it was important to assure the stability of the company by retaining cash. That consideration, at that time, may have outweighed the desire to provide a higher immediate cash reward to shareholders. 

Ultimately, the upcoming financial results will go a long way towards clarifying this situation.

Interesting Numbers.

Here are some interesting numbers that I was alerted to today.


Back in 2008 there were 93 biotech companies listed on the ASX that were required to report their cashflow quarterly. 


As of 2010 that number has reduced to 68.


It would be nice to be able to report that the reason for the reduction has been a large number of these companies being released from quarterly cashflow reporting (by stint of reporting positive cashflows for 5 consecutive quarters). Sadly, that is not the case. Most of this reduction in numbers is the result of these companies being delisted or moving to another field of endeavour.


In fact, only a very elite handful (3?) of these companies have reached that measure of success. As we know, Cellestis is one of this group.


It is interesting to further note that of the 68 companies remaining, nearly half have less than 12 months cash burn on hand and will likely require further cash injections to survive.


As I have said before, investing in startup biotechs is a high risk business. I am personally very happy that I decided to invest in Cellestis.

So far so good.

Thank you everyone for your entries in the CST Guessing Competition to date. The competition is still open for those that have been cogitating long and deeply over this.


Summary results so far.

Full Results.

Dividends (a little more).

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.

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?

• 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?

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.

$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 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"

   

AFR Smart Investor

Long term Cellestis holder, "Martin" posts the following.

Hello,

Financial Review Smart Investor magazine has Cellestis as a
'Small Cap Bargain' in the current issue, they list 25 companies which
have a financial health rating "strong"

The article headlines with "If you get in early on some of these
small-cap bargains you could hitch a ride to the corporate penthouse"

There is a fairly long description on what to look for in smaller
companies and brief specific coverage of each company.

Cellestis

"This biotechnology firm produces new blood test technology for
treatment of TB...Its Quantiferon products are in use worldwide...
It turned its first profit in 2008 and recorded strong growth in the first
half."

Martin

It's just a little bit nice to see that we are not alone in recognising the value in Cellestis. 
(Even if they have got what Cellestis does slightly wrong)

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

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?

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.

"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.

It's all about .....

.... Marketing.


As I said a week or two back, with the opening of the gate by the CDC, the challenge for Cellestis is to grab the bull by the horns and use all of its resources to market, market, market.


As I also indicated, Cellestis know this and have now demonstrated their intentions.

Radford: Now is the Time for Heightened Focus on the TB Threat

RADFORD, TB, TUBERCULOSIS, TB IN THE US, CDC AND TB, TB THREAT, GUEST BLOG, GUEST, CNBC, CELLESTIS LIMITED

| 28 Jun 2010 | 01:50 PM ET

While most people living in the United States might think tuberculosis (TB) is a disease that no longer affects this country, in reality, between nine and 14 million Americans are infected with the bacteria that cause TB.

Consider the number of people you come in contact with every day – at the office, home, airports, trains, buses, restaurants, schools, hospitals, and shopping centers – it takes just one person with TB disease in any of these settings to pose a risk to all those around them.

A contagious disease, TB is spread through the air when a person with TB disease of the lungs or throat coughs, sneezes, speaks, or sings, which may cause people in close proximity to become infected. TB usually attacks the lungs, but it often affects other organs, and if not treated properly, it can be fatal. Around one in every 10 TB-infected people will, without treatment, go on to develop potentially deadly TB disease.

So why is TB still prevalent in the U.S.?

A key reason has to do with the very things that are supposed to help protect us from TB: theBacille Calmette-Guérin (BCG) vaccine and the main method of TB testing traditionally used, the 110+-year-old tuberculin skin test (TST). The BCG vaccine is widely-adopted globally and its use engrained in TB control policies around the world. However, it is recognized by many around the world that the BCG vaccine confounds the TST and leads to false-positive test results.

This means that for the many foreign-born Americans who have been BCG-vaccinated, the usual method of TB testing will often indicate that they are positive for TB infection. With migration to the US (approximately one million per year, many from countries where TB is endemic), TB rates have been steadily growing in foreign-born individuals - in 2009 immigrants were nearly 11 times more likely than U.S.-born citizens to have TB.

Certain communities are also at higher risk: people with autoimmune conditions and those taking immunosuppressive therapies, the elderly, the homeless, and corrections facility inmates. As a consequence of frequent contact with high-risk individuals, doctors, nurses, and staff at hospitals and other group facilities are all at significant risk of TB.

The major challenge for the U.S. is to modernize TB control.

The first hurdle will be for the nation to adopt new strategies for TB control and diagnosis. TheU.S. Centers for Disease Control and Prevention (CDC) is taking steps to pave the way for change.

In a landmark Public Health release issued last week, CDC is now championing the use of modern TB testing strategies. The CDC advises that IGRAs, simple blood tests known as interferon-gamma release assays, are now preferred over the TST for diagnosing TB infection in many groups of individuals. Further, the CDC in conjunction with the U.S. Department of Health and Human Services (Division of Global Migration and Quarantine) recently published new instructions for immigrant TB testing, which allow the blood tests to be used instead of the TST in certain immigration populations.

Using these tests for immigration TB screening will prevent the large number of false-positive TST results in BCG-vaccinated immigrants and stem unnecessary (and expensive) evaluation and treatment.

The distinct advantages of these blood tests, such as QuantiFERON®-TB Gold (QFT®), are greater accuracy over TST and not being confounded by BCG vaccination.

These blood tests frequently show that fewer than a third of those previously thought TST-positive truly have TB and can provide more valuable information for physicians to diagnose TB infection. Economic studies show that, when staff time and evaluation of TST false-positives are included in cost comparisons, QFT reduces testing program costs by seven percent while providing superior medical outcomes.

Public health and TB control programs across the U.S. are also successfully beginning to implement change.

At the forefront is the San Francisco Department of Public Health’s TB Control Health Program. The program’s switch from TST to QFT resulted in a more than 60 percent decline in the number of people testing positive for TB last year and, thus, a reduced number of follow-up visit costs. Despite this lower number of positive results, no cases of TB have been reported as missed in more than 45,000 people screened for TB in San Francisco since QFT was adopted.

Switching for healthcare worker screening alone saved the program $101,648 in the course of one year.

The CDC’s announcement is a great move in the direction of tackling how TB is tested. Success will eventually be measured by local government and other groups’ adoption of these guidelines. Although TB is not on most Americans’ radar, it remains a significant public health threat in the U.S., with still much more to be done.

_________________________
Dr Tony Radford is the founding CEO of Cellestis Limited, a biotechnology company formed in 2000 in Melbourne, Australia, and listed on the Australian Stock Exchange (ASX). Dr. Radford was a senior member of Australia’s Commonwealth Scientific and Industrial Research Organization (CSIRO) team that invented the patented QuantiFERON® technology, which is used world-wide for testing for diseases such as tuberculosis. Cellestis develops and manufactures the QuantiFERON®-TB Gold (QFT) test, a breakthrough blood test for the detection and control of tuberculosis.

URL: http://www.cnbc.com/id/37979037/