Monday, October 6, 2008

Analysis Update - PGL - Progen

Price($) 0.72
NTA ($) 1.31
P/NTA 0.546
Team 7.5
BurnPeriod 4.89
ProductPipe 2.4
ForeignMarket 1
Cash:Debt Debt Free



Following the abandonment of its most advanced study (Ph III PATHWAY study for liver cancer), this marks the third failure of the compound PI-88 (previous targeted applications were lung and Prostate cancers). Its other series of compounds (eg PG 500) are in pre-clinical stages of development. The company mentions it is focussing on M&A with the remaining funds. The product index has fallen to 2.4 which is below average.

Cash burn is a main indicator for yet to be profitable biotechs. In the case of PGL, its re-capitalisation in the last financial year of over $92m still leave PGL with over $76m this financial year. Simple projection, assuming constant cash burn indicate PGL can last over the next 5 years.
Other financial indicator point to a relatively strong position with no debt.

There are many questions to be asked of this company. The fundamental question is what will PGL do with its stash of cash? How could it have abandoned a late stage product, for which so much cash has been raised? What kind of perseverance can we see from PGL for its remaining early stage products?

Although it is currently trading much lower than its net tangible assets (almost half), investors need to be convinved by management that they can convert the pile of cash into greater return, rather than being consumed with no returns.

Thursday, October 2, 2008

Lightning Analysis - AVE - AEVUM Limited

Following huge volatility in the sharemarket over recent weeks, it is now time to look at commercial / industrial stocks, while always keeping an ear open in the biotech space. The reason is not of fear and panic of the market, but simply a recognition that there may be undervalued stocks out there. Note that, Warren Buffet's Berkshire Hathaway just invested US$3bil in GE preferred shares. This follows a US$5bil investment into Goldman Sachs 2 weeks ago.

Hence it is time to go hunting.....

One local aussie stock that look stable due to its nature of business is Aevum Limited (AVE). AVE is in the business of managing retirement villages. One would expect a steady income stream unaffected by the current market turmoil. The rationale is the AVE's clients would have saved up for their retirement and they would tend to belong to the higher than middle income group, thus able to support themselves.

Having selected the industry and company, next step is to dive into the financial statements (see its 2008 Annual Report) ...

The first focus is DEBT. AVE has long term debt of $80m; which appeared to be taken on during 2007-08, having repaid previous debt. This compares to cash of $17.5m, receipts of about $21m and total assets of over $809m. A large portion of assets comprise of investment properties at $790m, and little intangibles. On the surface this appears good, in terms of the relative size of the debt to hard assets, as well as the ability to service its loans.

The next thing to look at is the cash flows. Over the last 2 financial years, AVE has made significant acquisitions - $118m in 2006-07 and $52m in 2007-08. While this is not necessarily bad, there should be caution on companies that tries to grow too fast too quickly, especially in such a bear market, with worldwide recession looming.

Also from the operating cashflow, the net operating cashflow, although positive $20m, is made up of other quantities such as resident loans and bonds. The receipts from residents and subsidies are only $21m compared to payments to suppliers and employees of $31m. These two quantities should be considered the basis of the business and the outflow in this case is more than inflow.

The above discovery leads to a more careful look at the profit statement. Overall, the profit is $28.5m, compared to $22.9m the previous year. Looking at the details again, out of the $60m gross income, only $24.7m is from revenue, the remainder is due to revaluation of property. This compares with an expense of $28.4m. The question is, without going to the actual sites nor knowledge of the real market price, can we believe that the properties can be revalued to an extra $35m? Clearly without the revaluation, there would be a net loss.

The summary is that AVE looks to be a business that would be stable in a frightening bear market. But open closer inspection of the financials of the company, the real amount of money made from the business does not look too promising.