Analysis - BRC - Brain Resource Company

The following is a very quick analysis - a look at key numbers of BRC. This analysis is prompted by the sudden increase in buy volume of BRC today. Not only is there a 15% price jump, the volume traded got a big boost. This certainly looks like someone knows something is going to happen. So the question is whether it is worth the punt?



Date Open High Low Close Volume
11-Mar-10 0.26 0.30 0.26 0.30 765,530
10-Mar-10 0.25 0.26 0.25 0.25 0
9-Mar-10 0.25 0.26 0.25 0.25 0
8-Mar-10 0.26 0.26 0.26 0.26 4,000
5-Mar-10 0.26 0.26 0.26 0.26 7,500
4-Mar-10 0.25 0.26 0.25 0.25 0
3-Mar-10 0.25 0.26 0.25 0.25 0
2-Mar-10 0.25 0.26 0.25 0.25 0
1-Mar-10 0.26 0.26 0.26 0.26 58,500
26-Feb-10 0.26 0.28 0.26 0.26 0
25-Feb-10 0.27 0.28 0.27 0.27 0

A quick analysis of the numbers in the half year report are shown in the numbers below. On the positive side, BRC is a biotech / diagnostic company where the core product is not drugs, rather it is a large database of brain related information and specialised software for brain analysis.







Date 11/03/2010
CMP 0.3
EBIT 672067
NPAT 778185

Interest Expense 0
Interest Earned 106118
Net Interest Expense -106,118


Debt Short term 0
Debt Long term 0
Debt Other 0
Total Debt 0

Cash 14,672,976
Intgb Assets 13,359,586
Deferred Tax Assets 350,000
Depreciation 51,027
Interest Bearing Investments 0
Total Assets 30,247,849
Total Equity 12,402,599

Sales 3,828,462
Cost of Goods 2,524,225
Cash Flow from Operations 1,462,214
WANOS 91,714,454
EFPOWA 91,714,454
Shares at End of Period 91,714,454

ROR (Required Rate of Return) 10

PE Sector 12.95

Net Income 778,185.00
Gross Cash Flow 829,212.00

Net Debt to Equity = -1.18
Net Debt to (Total Assets - Intangibles)-0.87
Net Debt / (Net Debt + Equity) 6.46
Net Interest Cover Ratio = -6.33
Debt to Gross Cashflow 0
CFPS 0.02
EPS current 8.48E-03
EPS previous 3.80E-02
PER 35.36
Gross Margin 34.07%
NPAT Margin 20.33%
NTA/share -0.01
ROE 6.27%
ROA 4.32%
Market Capitalisation 27,514,336

EQPS 0.14
Buffet Value 8.48E-04

EPS Growth -77.67%
PEG -0.46


Financially, BRC is debt free. It is a profitable company, unlike majority of cash-burning biotechs. Cash flow numbers look very good indeed. Hence the 3 major financials of profit - debt - cash flow; all look very good.

On closer inspection, we see the intangibles asset is almost half of the total assets. In fact the Net Tangible Asset (NTA) becomes negative because of the large intangibles. In addition, there is a big contribution to liabilities from Payables - which is almost 10 times receivables. Is it healthy for a company to have such disproportionate payables? When are they going to need to pay up?

In addition the ROA and ROE are quite modest. Applying the Warren Buffet 1981 formula, assuming we are asking for a 10% Return on our investment, the formula puts a price on BRC of $0.00085, which is certainly less than $0.30.

Opinion to myself: Buy quickly if brave and pull out soon. The long term health of BRC is yet to be confirmed.

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.