report today from aegis
Despite a large market potential for CMQ's unique growth enhancer for pigs and poultry, investor confidence has been dented by construction and approval delays, cost overruns, repeated equity raisings and poor sales pre-commitments. However, the convertible bond funding, new Board appointees and CEO and the large positive field trial raise our confidence level. Lack of a major sales order and a high cost structure remain issues.
A major purchase order by one of the large South African poultry producers would be a significant price catalyst. Nevertheless, management must reduce operating costs, deliver production at nameplate capacity and decide how to scale up supply so that emerging demand can be closely matched. Once again we stress that CMQ is a highly volatile and high risk stock. HOLD.
Current Issues
Earnings Outlook Significant sales of CMQ's veterinary drug have not yet eventuated, although recent plant approval removes one stumbling block. CMQ does have one $1.5M advance order from a South African distributor and we expect to see significant South African sales in FY06. CMQ remains confident of demand outstripping capacity in the short term. We see losses reducing over the next four years, but do not expect CMQ to be profitable until 2011. Risks CMQ's key risks include cash risk, should the company not meet the convertible bond performance hurdles; a costly, distracting fight with ASIC; regulatory risks causing delays or denials of product approval; operational risk that its production facility will not reach nameplate capacity; market acceptance risk, as there is still no evidence of strong demand by major industry players; and obsolescence risk, as another company may have a more effective, lower cost product in late stage development. Primary Share Price Catalyst With the convertible bond funding in place, a new CEO appointed and the filtration issue resolved, CMQ shares are most likely to be driven in the short term by news flow concerning a major purchase order. Initiatives to reduce operating costs by outsourcing parts of the manufacturing process would be well received by the market. Regulatory approvals in new markets and news of ASIC's action will also be modest price catalysts in the short to medium term. Last Result Comment CMQ reported a net loss of $13.6M in 1H06, a similar level to 1H05. Sales of just $0.06M were recorded. Operating expenses of $10.1M remained at comparable levels to 1H05. CMQ is doing a reasonable job of controlling costs while awaiting the plant to reach full nameplate capacity and a ramp-up in sales. The most significant operational development in the half was the progress made on increase plant capacity towards nameplate levels (72-78% by end Jan-06).
CMQ Price at posting:
0.0¢ Sentiment: Hold Disclosure: Not Held
