belief vs skepticism

I concluded my last post by saying that NBS is close to a major inflection point. We are now at the start of this inflection. However, even with the recent strengthening of NBS, the stock is still priced on an expected FY09 pe of only around 5.3 and an expected FY10 pe of around 2.5. (The expected FY10 NPAT of $100mill comes from Lodge. It is a figure derived from existing contracts only. I.e., any new contract wins over the next 6 months could potentially increase this figure. Lodge have also made sure that this number is consistent with management expectations. I have been informed that, in general, if NBS management think analyst expectations on the earnings front are unrealistic, they will inform the analyst of this fact. So, even though management have not put out an official forecast for FY10, we can be reasonably confident that the range of analyst earnings forecasts for FY10 are broadly in line with management expectations).

Under normal circumstances, the market prices a growth company with a PE of 5 or lower only if the company is in serious trouble (a forward PE of 2 indicates that the market has virtually no faith in a company's outlook). Is NBS in any sort of trouble? I think not (see my previous posts on the ETC thread). So, in my view, NBS is still subject to a massive mis-pricing by the market.

Indeed, if the market was to believe analyst earnings forecasts and feel comfortable with the NBS story, then NBS should get within touching distance of a $1bill market cap sometime during FY10. After all, NBS would only need to trade on an FY10 NPAT multiple of around 10 to get a $1bill market cap. That equates to a fully diluted share price of around $2.20. So there is massive upside potential for NBS if the market chooses to believe the story.

Right now, the NBS's tiny earnings multiple indicates that there is still considerable skepticism and/or ignorance about NBS' outlook. While the momentum is changing quite quickly in favor of the believers, the FY09 full year results, and analyst/media interpretations of these results, will be critical in ensuring that the market finally does choose to believe the NBS story.