Bell Potter downgrade 23 November 2015, page-75

"...but hasn't the capital raising been the catalyst for discovering a market mispricing of MSB?"


@Southoz,

Of all the stuff posted here in the past few weeks, your post I think is the most significant.

Here's why I think so...

At the risk of contradicting an earlier post of mine, you are right: clearly the capital raising did precipitate some sort of change in the way the market views MSB.

But what exactly the drivers of that change is, I cannot tell.


When trading in the stock was halted (but prior to the terms of the capital raising becoming public), I had no idea what the share price might do on the resumption of trading.

- Would the company be accessing a population of investors who had still not heard the Mesoblast story?

- Would a NASDAQ listing bring with it a certain halo effect?

- Would access to this large capital market mean that MSB would be raising sufficient capital that it would see the company to the position of commercial self-sufficiency?


But when the terms of the IPO were announced, and I saw the price and also the limited quantum of capital that was being raised, then I thought, "Uh, oh. This doesn't look good."

At the time I thought that the share price was likely to struggle to make its NASDAQ debut much above the issue price - despite the very steep IPO price discount.

But given the 34% discount and that the new capital being issued was not overly material compared to the market capitalisation of the company, I still thought that the stock would trade a tad above the issue price, maybe at US$9.00 to US$9.50 (effectively $2.50 to $2.70 for the ASX listed stock).

So clearly things have transpired in such an ugly way that even my less-than-sanguine expectations failed to contemplate.


Why this has happened - which I think is the nub of your question - I don't know.


If I was forced to hazard a guess, then I'd say the principle reasons for the way the stock has traded following the IPO has been the market imputing one, or a combination, of the following factors:

- the market may have been expecting some partnering arrangement would obviate the need to raise more equity capital, and/or

- the NASDAQ raising, having come quite soon after the capital was raised from Celgene, might have focused the market's attention on the fact that the company's cash consumption is high relative to the level of available cash resources


But that's all history and is probably not that useful for informing the investment equation, going forward.

The question now - like always - takes the form of "as a fresh investment decision, is the stock now a buy after the collapse in its share price?"

I'm afraid that I don't have an answer to that.

For precisely the same reason that I haven't had an answer to it from Day 1 when the share price was over 3 times higher than it is today: I can't adequately dimension how much residual downside risk there is.

Because downside risk is limited - ultimately - by the fundamental support of intrinsic value.

And the reason I can't dimension the downside risk for MSB - even today - is because I am unable to derive the intrinsic value of the business. And as far as I can see, no one else can, either.

And the most striking thing to me is that of all the many hundreds - indeed thousands - of posts about MSB, the amount of times that underlying, fundamental value is mentioned or referenced, you can count on your one hand.

Arguably the fundamentally most important investment consideration… yet it goes completely and utterly ignored.
Absolutely astonishing!

Over time whenever I have raised the question of what the intrinsic value of the company might be, it has been met either with stony silence or has been dismissed as if it doesn't matter, along the lines of "Pah, you and your intrinsic value mumbo jumbo finance-speak, Madamswer... that fancy pants stuff doesn't work for this stock. This is a different situation. You just don't get it."

Trouble is, and one poster put it so succinctly in quoting "Successful investing requires not so much getting a return on your capital, but making sure you get a return of your capital."

If you make 10 investments, and 9 of them in a row a are sensational performers, but in the 10th one you lose 80% of your dough, the prior success you've had - no matter how impressive it was - counts for nought.

Which is why so many of the world's great investors place capital preservation as their paramount priority.

When you say, "In short just completely don’t understand it; because it implies that we all had it wrong about MSB for years," you are – unwittingly, maybe – touching on THE most critical issue for the stock…. IT’S FUNDAMENTAL INTRINSIC VALUE.

And no one can tell if, valuation-wise, the market indeed had it wrong about MSB for years.

Or indeed if the market valuation is right today.

For the purposes of making an informed investment in MSB, the intrinsic valuation of the business is the single most important discussion to be had.

Yet no want wants to have it.

For the life of me, I simply can’t understand why not.