open letter to tradingfreak

Tradingfreak,

I know you have followed and respected the inputs of a lot of us here on HC in your last 12 months in the stock. So you may care to hear this alternative view point.

You would do well to reconsider the advice provided by Chaffcombe – and also recently taken up by gsw on the Oraline 8 thread (although gsw has more recently commented that he may have been a ‘bit harsh’).

Chaff’s argument is that company management has been negligent in not hedging the rights issue funds against the US$.

In hindsight, it is clear that the company would have been better off it did this.

But was the company negligent in not doing it? The general consensus at the time was that the US $ would experience more weakness – so many Australian companies with US-based expenses could well have been caught in the same position.

So what is the downside? At the moment with the 30% devaluation, we have a POTENTIAL ‘loss’ of around $600,000 value in the funds remaining after payment of issue costs and payments to Dr Sun (BUT ONLY IF the exchange rate stays at the current low level for the next 12 months and there is no increase in company income).

That $600,000 is 18% of the total rights issue funds of $3,178,963.

In other words, the current potential diminution of value is equivalent to an 82% take-up in the rights issue and with NO change in currency values.

That, in my view, would have been an OUTSTANDING result in the circumstances. Certainly not cause for dumping your shares. It is still $600,000 above the minimum subscription required for the rights issue.

In effect, the fantastic 100% rights take-up has provided the company with an excellent buffer for rolling out its business model over the next year.

Of course, it’s a shame the buffer has been eroded by currency devaluation – but this is the type of circumstance where such buffers are so useful.

So while, in my view, the $600,000 potential ‘loss’ can be accommodated (ie will still get SBN at least to the full roll out in China) the more important question is “is it really a $600,000 loss?”

I would say most likely not. That loss assumes that all remaining funds will be transferred to the US at the current ‘trashed’ exchange rate.

But some forex forecasters are seeing a substantial retrace over the next 6-12 months (back to the 80c level). As well, as US$ income streams increase next year (from additional Chinese orders, CMM, Medinat, Mexico, Bioscreens, Oraline 8 and hopefully Probeline), these will OFFSET the currency losses as funds are repatriated to the US – perhaps considerably.

For example, the recent Bioscreens initial order of US$68,000 translates to AUS$106,000 (at current exchange rates) in terms of those offsets.

Tradingfreak, I really believe that, as the business plan rolls out over the next 6 months, the current price levels are going to be looked back upon as a fantastic entry opportunity and an absolute disaster for exit.

I think you really need to consider whether the motivation in the advice given you is based on a sound interpretation of the fundamentals or whether it is just a fit of pique, brought on by what was interpreted as a rebuff and arrogance on the Board’s part.

Biding your time will, I would think, place you in good stead. But you are, of course, your own man, so good luck in whatever you do.