Ann: Change in substantial holding, page-30

Just some notes on Valuation, as I've been looking at this as a cashbox. Although valuing businesses is hard, valuing money in a bank account is pretty easy. It's basically the cash and investments they reported at 31st Oct of $34million, less the time and cost of windup of the current business.

If you think the current business has some sale value or can be given away you're kidding yourself. But that's another post. I'm starting from the assumption it has no value and needs to be wound up.

Best case is Merchant win shareholder vote in Feb and start winding up 1pg operations from 1st March. Highly unlikely it will be that smooth but let's assume this for the exercise.

Senior staff may have 6mth pay out redunancy clauses, other staff 3mths or just 1month notice period. Office leases are multiyear but can be relet hopefully. Supply contracts need to be terminted. So a wind down can take 6mths plus to effect, but let's assume 3mths at full burn rate as an average cost proxy.

Cash burn is $3.7m per qtr.

Time required is from 31 Oct to 1st March 2017 to start layoffs, plus 3mths run off cost, equals 7 months or $8.6m burn. Allow 1mth contingency and some uncertainty allow say $10m.

So $34m less $10m cash burn to end of wind down gives a $24m cashbox at end of process.

They then need to have some funds to keep things ticking over for up to 12mths whilst they look for a business and include some due diligence funds to review a number of opportunities. Assume $3m as a plug figure to cover time and costs to transact a new business.

That's a valuation of this as a cashbox of $19million best case, or $0.12 per share.

Deduct from that any delays in starting the windup past 1st March, which are likely, or the potential for Merchant failing and the business runs as is until out of cash.

Therefore, I'll get interested in this at a price around $0.10.

I'm interested in any insights as to why such a valuation may be wrong.

This stock is full of retail traders who normally don't think about valuation, but as people work through it and realise, the price should come back. Merchant are building their position at the moment so that's supporting the price. Should fall once they are done.