Bell Potter downgrade 23 November 2015, page-38

"The significant drop now to $4.5 is due to the reasons outlined below..

Negative sentiment and the company losing 34% of its market value on NASDAQ listing. This is a fact that has happened and stock price fall reflects that. Should the analyst ignore it?"

You are right; no, he/she shouldn't ignore it. But the theoretical ex-raising price is $3.28/share, which is a mere 3.9% discount on the last closing price prior to the trading halt relating to the capital raising.

So the mathematics of the capital raising explains less than 4% of the analyst's 50% target price reduction.


"Vulnerability to corporate take over. Because the technology has not changed and the company as per prospectus still aims at delivering its clinical and commercial milestones timely, the stock price falling does leave the company extremely vulnerable to this. Huge risk and has to be accounted for in value somehow, which explains the higher WACC."

By its very definition, the WACC for any corporation should be fully risk-reflective. Because that's how capital markets work. Capital providers levy a cost on the capital they provide, and the quantum of that cost is a function of risk.

What you are saying is that the analyst has now imputed a higher WACC because "risk has to be accounted for in value somehow".

But that's my whole point: analysts - if they were remotely competent - would have in the first place have made an assessment of the risks and fully incorporated those risks into the discount rate they utilise for determining the Discounted Cash Flow valuation.

To say that as the stock price has fallen the analyst has taken account for risks by raising his WACC (and therefore lowering his DCF-derived target price) is no different to saying the analyst lowered his target price because the share price had fallen.

And that's my beef with these analysts and their "target prices": target prices are classic lagging indicators that do little other than follow share prices around.

Which is why I rail against people who quote target prices as though they carry some or other mystical intellectual weight; as if they were somehow computed by highly talented and rarely qualified people with some sort of special financial nous that the mere mortals like us don't possess.

Target prices were born out of the bursting of the dot com bubble in the early 2000s, when equity market regulators in the US - in an attempt to restore some semblance of credibility to the financial services sector on Wall Street - tried to introduce some "financial science" to broker research by forcing analysts to quote target prices.

And yet no audit of target prices is ever performed in order to establish their veracity.

Based on my observations, there are very few constructs of the financial services industry that are so misleading, so flaky in derivation, and that lead to such errant behaviour, as broker target prices.

They are heinous concepts, if not in intention, then certainly in implementation.


"Expected need for additional funds in CY17 if they don’t do a partnering deal.."

Heck, this is nothing new.

Probably 90% of people in public chatrooms aren't financially qualified, yet most of them are able to figure out that the company needs funds.

Are you saying this issue has only now just dawned on the analyst, which he has suddenly needed to incorporate into his target price?


"Expect overhang to continue for some time till company delivers on clinical and commercial milestones."

Again, this is nothing new. This is a One-Oh-One statement about any company in MSB's evolutionary stage. It should already have been incorporated into valuation a long time ago.


"There was an event and though fundamentals haven't changed other things surrounding the company have changed. This needs to be accounted for by any analyst worth their grain."

As I have shown, the only new piece of information emanating from this event that an analyst "worth their grain" should account for is a 12.8% increase in the company's Issued Share base, at a price that was at a 33% discount. The weighted ex-raising price is $3.28., i.e. a 3.9% diminution in value.

Any adjustment above that amount is just a fudge to avoid the gap between share price and target price from remaining embarrassingly large.


"The report is balanced and while critical of the funding, I do not see that the investment thesis has changed. Nor the methodology.. still using DCF.. unlike some others out there who suddenly have dropped using DCF to get ridiculously low targets.."

I haven't read the report so I'll take your word that it is balanced. But that you don't see the investment thesis nor the methodology having been changed, that makes the dramatic reduction in the analyst's target price even more ludicrous.

And once again, all this serves to add to the body of evidence of target prices overwhelmingly being worth little more than a pile of horse manure.

On most occasions, it looks to me like analyst just make up their target prices.


"You want to be critical of brokers then be critical of all of them then just picking some personal vendetta with the minority who are pro the company.. I did not believe it before but now I can see why people on the forum think you are overtly on the pessimist side..

Oh, having been a consumer for many years of the tripe they peddle, I am critical of all brokers and investment bankers. Even analysts who "get it right" carry no weight with me, because I think there is far too much statistical randomness inherent in equity markets.

The only reason this particular broker is the focus of discussion is that it has long been upheld by some posters, and has been oft-quoted and much-vaunted, as one of the very few that "get" MSB and, by implication, whose target price and recommendation carries some weight.

And in the past, if anyone dared question this broker's target price, the result would be a barrage of hostility and scorn from the stock's cheerleaders.


"I would not believe a broker who tells me company discounted itself by 34% and then stock price dropped even more, but I have blinders on, don't care what the company does and still will maintain $9 target.. which would be some ridiculously 400% upside from current stock levels."

What you are describing there is exactly what I'm talking about, namely that analysts adjust their target prices to where the share price has gone... and not the other way 'round.


"I can visualize the company delivering on milestones and at least reaching the $4.5 level over the next 12 months.."

That makes eminent sense as the basis for investment, and good luck to you.
I really wish you well with your investment approach.

Because at least it is based on some form of a first-principles approach, as opposed to a broker target price.