why gbi will deliver 10x returns over 12 mths, page-22

TTH,

See below re part (a) of your 1st question.

(1) Is a GBI price target of $1.60 still realistic?

IMO a SP for GBI in the $1.50 to $2.00 range is possible by Q4 this year and is unequivocally supported by 2 valuation approaches for GBI…(a) as a stand alone company and (b) as a trade sale.

(a) Value of GBI as a stand alone based upon TSOI = 63.2m shares (fully diluted for options on issue) is $2.00 to $2.08 per share.

This is derived by the following assumptions.

PapType being sold initially in the UK, Germany, France and Switzerland as well as Australia and NZ. Entry into these markets will commence in late 2009 initially with an ASCUS/Triage indication and after 2011 as a general screening test. According to Deutsche Bank ASCUS smears make up about 7% of total LBC smears.

Assuming that GBI’s pending pivotal data is equivalent to the Oct 2008 data PapType is in a very strong position to capture a significant % of these markets in the ASCUS/Triage indication…say 30-35%...Sonic Healthcare are also the largest independent pathology provider in Europe.

As a screening test, I assume that PapType’s market share is significantly less…say 5% moving up to 12.5%....screening volumes to Sonic Healthcare alone can make a fair justification for this assumption.

The sales profile will therefore be initially weighted to the ASCUS/Triage indication and then from 2012 thereon screening sales will make up the majority of PapType sales.

Other key assumptions here are the proportion of LBC as a % of total pap = 60 to 70% and the % of ASCUS receiving a HPV test = 75% also an ASP of US$14.00 or €10.00 = approx A$17.25.

These assumptions produce PapType revenue of approx $35m for the said European markets and about $5m for Australia and NZ in 2012.

As these European markets are in their relative infancy versus the US market, I would expect natural market growth in the range of 25-30% CAGR out to 2017 with initial market growth rates significantly higher. Morgan Stanley also shares a similar view.

Gross margin should be in the range of 75 to 80% and fixed costs at peak will be approximately A$5 to A$6m per annum. Note that I expect fixed costs in the short term to be substantially lower, particularly if a regional partnering deal gets done in the next 3 to 6 months.

All of the above produces an EBIT figure of A$24m to A$25m in 2012. Capitalise this figure at 8.0x and discount back to 2009 at a 15% WACC = EV of A$126.2m to A$131.5m, OR

**********$2.00 to $2.08 per share (fully diluted)*********

Note that with a market growth profile of 25-30% CAGR a 8.0x multiple may be seen to very conservative.

Finally off the top of my head I think that an Asia Pacific deal for PapType could add another $0.75 to $1.00 per share.

I have not assumed any US sales in my valuation as I believe that to get PapType into the US market as a class 3 device will take a pivotal trial costing approx US$20m and such would be best left to a large trade buyer with strong experience in the US regulatory process.

That being said the potential US market opportunity would be a strong incentive for any buyer in a trade sale scenario.

If people are interested in (b) my trade sale valuation approach happy to share in another post.

cheers