Ann: Preliminary Final Report , page-33

Gustie, heres my view after keeping an eye on this since listing.

Mesbon produce high volume / low gross margin products (even with the premium products). Small movements in the gross profit margin (%) have a big impact on profitability. Their state-of-the-art facility should be competitive, though Im guessing that competition on price is intense.

July to October 2009 must have been exceptional gross margin months to give $3.7m NPAT (over the 6 months to December, versus a loss of $1m in the prior 6 months). My guess is that a sales price rebounded occurred while they were still processing from cheaper raw materials on hand. This looks like a one-off bonus to me.

Mesbon state in the annual report that further premium product should provide improved margins over those generated in the latter part of 2009. Elsewhere the company notes cost pressures mounted in Nov/Dec 2009 which reduced the gross margin for these months to 4.9%. So that is the current target they want to beat.

For comparison, the average 2009 gross margin was 8.17% producing a gross profit of A$10.4m and final NPAT of A$2.7m. They also comment that raw material costs are expected to increase after December 2009 (ie into 2010), so they stocked up on some materials at previous prices.

Reworking the figures. If an average gross margin of 4.9% were applied over 2009 gives a gross profit of $6.2m and little NPAT. I think the central issue is that profits or losses can move dramatically with the high beta from the tight gross margin %. A small % movement has a big effect.It looks cheap on some metrics but carries that volativity factor imo, which can work for or against holders.