a note of caution, page-13

Hi wayout,

During the analysts briefings on the day the preliminary report was released NBS management told analysts that more cash had come in post balance date. While, they refused to quantify this cash or say where it had come from, they seemed to imply that it was from Malaysia (or at least that is what some analysts understood them to be saying). Connecting the dots at the time, analysts and myself assumed the extra cash was for an additional print run in Malaysia.

However, in light of the Full Year Statutory Accounts, I now believe that NBS has yet to complete a full print run for the Malaysian contract (despite this contract supposedly being up and running for nearly 6 months now), and this additional cash was not from Malaysia or China, but was simply further consulting revenue.

If NBS was running on all cylinders, and if the contracts were of the size that NBS management originally said they would be, then NBS' should be receiving cash receipts that look something like the following:
Consulting Business: $1mill-$1.5mill per month
Malaysia: $6-7mill per month
China: $15-20mill per quarter

I now believe that NBS received a small payment from China (probably software related) on or around June 15, but has received no payments from China or Malaysia since then. The additional cash cited by management was probably an additional $1mill from the consulting business. (BTW, there is no point trying to find an 'absolute base' for the NBS share price on the basis of the consulting business; In time, this consulting cash will begin to decline because that business is slowly being wound down).

But the key falsehood that I now believe NBS management perpetrated to analysts (and perhaps to Orbis as well) following the preliminary report was that "The implementation of both the Malaysian Immigration contract and the
China Gas Tank project has gone very well" (this is a quote from the Lodge report that came out at the time). Clearly, Malaysia has not gone very well at all, and if the China cash does not come in in the next week or so, then I'll probably conclude that there are serious problems with the China contract as well. At the moment I'm still prepared to accept that the China payments are simply a bit late.

Keep in mind that NBS has given two different start dates for the start of printing for China (April and May 18). Given that China is on a 90 day billing cycle for the printing part of the contract, an April start date would have the first significant printing account due in July. A May start date would have the first account due in August. Either way you slice it, the China account is now more than 30 days past due. NBS management have recently told one fund manager that the reason for the delay in the China payments is the PRC 60th anniversary celebrations (this fact was also reported in the recent Foresight note).

If the 60th anniversary delay proves true, then the next week or so should provide a healthy trading opportunity. But if this proves false, i.e., if there is no announcement on China cash in the short term (or at least a an honest explanation from management about what the hell is going on), then I think there will be a rush for the exits that well exceeds the rush we have already seen over the last week.

But no matter what happens over the next week or so, I think serious questions now have to asked as to whether NBS management have negotiated these contracts adequately. And given the opaque nature of NBS ASX releases recently, if NBS was to announce a new contract win next week, would the market necessarily believe it?

PS., there is nothing obviously suspicious about the China bond payment, and punters shouldn't waste any more space discussing it. NBS will get this money back when the contract is concluded (so investors better hope it is not returned any time soon!).