The Good, the bad and the uglyThe current valuation of roughly...

The Good, the bad and the ugly

The current valuation of roughly US$85M for our wholecompany is actually reflective of a “start-up” gaining traction on its tech andwhile starting to experience some positive cash flows, the result is stillbogged down by some legacy issues. If we apply the forecasted SPS andRR revenue of $80M to our market cap, and if we are able to achieve a grossmargin of 35-40% on these, our current valuation would seem a bit low.

A quick analysis on the result, I think we need to achievean EBITDA of about $10M to achieve a positive NPAT.

Here are the Good, Bad and Ugly in reverse order.

Ugly

The final result is fugly, but all within reasons andexcuses. Had we not received the $3.778M from Doug Brown and the other 2 investorslast May at the 21c per share CR, we would have shown a negative equity in thisresult. Extrapolating our forecasted EBITDA of $4M this year, we may still needa cash injection of $6-7M to stay in positive equity.

Bad

Reconciling the $2.3M positive EBITDA announced last monthwith the results today:

EBITDA		2.3M
less
Interest		-4M
R&D		-3.8M
Other Losses		-9.8M
(Assumed)Depreciation		-0.7M
NPAT		-16M

While interest and R&D are expected items, I believe itis the Other Losses that dragged the final results down terribly:

I guess new boss comes with restructuring, and it is an onceoff item; the strength in US$ does impact badly on our bottom line. However,Onerous Contracts Provision, Inventory Reserve and Non-Operating expenses areitems I need some clarification from the management.

The Good

Operating performance is improving in terms of Gross Margin.2H2022 we actually managed a GM of 29.36%. However, I believe the General andAdmin expenses have been front loaded in the same period which resulted theOperating expenses came up to 23.79%.

		1H 2021	2H 2021	FY 2021		1H 2022	2H 2022	FY 2022
Operating revenue		39,694	63,499	103,193		60,170	58,918	119,088
Cost of Sales		-32,104	-49,396	-81,500		-49,454	-41,617	-91,071
Gross Margin		19.12%	22.21%	21.02%		17.81%	29.36%	23.53%
Gross Profit		7,590	14,103	21,693		10,716	17,301	28,017
R&D		-1,921	-1,752	-3,673		-1,446	-2,333	-3,779
SG&A		-9,877	-10,868	-20,745		-12,437	-14,019	-26,456
SG&A Margin		-24.88%	-17.12%	-20.10%		-20.67%	-23.79%	-22.22%

Gross Margin less SG&A Margin gives us some indicationof EBITDA and it has improved over the 2 difficult years.

Cash Flows

The unique case of the project in Ivory Coast is that wehave to add the cash flow from operating activities and the “Funds transferredfrom term deposit, net” from the Cash flows from financing activities to betterreflect the total operating performance. For FY2022, it shows a negative $9.6M.

However, if we take into the account in the update lastmonth, “The project has now recognized91.1% of total revenue and 80.4% collected from the customer.” If the final EURO16M of revenue represents theremaining 9% of the project, that means there is about EURO19M billed and notcollected on balance date. That would be our cash inflow for this quarter whicha portion would be released from the term deposit held by us.

If we do take that into account, the operating cash flowwould have been positive by about $4M if not for the cut off on balance date.(Note the increased in trade receivable of about $12M).

Deferred Revenue

This probably consists of 2 portions. The long term depositof $9.5M which forms part of Ivory Coast prepayment and it will be drawn downafter the warranty period. The balance $15.5M could be the 30% down payment tous for agreement to supply our equipment to our customers, and there isprobably a chunk in the unresolved PVDSA carried over from RWL days. These arenot of immediate concern and are going to reflect in our future P&L asrevenue.

In summary, these 2 years will be binary for us. If we can gain traction in USA with the enlarged sales team in place since October 2022, and bring forth some goodies, and the recovery of the China operation in the second half, we may get a positive surprise of a higher than forecasted EBITDA of $4M.