clear heads will prevail

Today's fairfax article presents NBS with a serious (but short term) public relations problem, but because no conviction was recorded, it shouldn't present any material problems for the company. If Dykes had received some good corporate communications advice over the last couple months, he would have told analysts and major stakeholders about this issue well in advance and prepared the ground (I've checked with analysts today, and he didn't do this). Had he done this, NBS probably wouldn't have suffered today's minor sell off. Indeed, he probably would have got some brownie points for being open and honest about a personal issue. Analysts love honesty.

NBS management need to learn a very basic point about corporate communication: the market doesn't like negative surprises, but loves positive surprises, and every release to the market should be designed to minimize the chances of creating negative surprises and maximizing the chances of creating positive surprises. The key communications error NBS has been making recently is to not give any details about potential negatives, but only speak about future positives (such as the company's huge pipeline). In fact the company should be doing the opposite.

The company has admitted to making a mistake about releasing too much info re the Vietnam contract a year ago.

Here is a list of more recent corporate communications mistakes from NBS:
(1) June 15: the company should NOT have told the market to expect further cash from Malaysia in the June 30 accounts unless it was absolutely certain the cash would in fact come in before June 30. In fact, the additional cash did not appear in the June 30 accounts, and, not surprisingly, this caused a sell-off on the day the results were released.

(2) The company could have rectified the June 15 error to some extent by being open with the market as to why the Malaysia cash was delayed. The company may have thought they didn’t need to provide commentary on the missing cash because at June 30 the Malaysian debtor was still less than 30 days past due. But that is not how the market works; the company itself created the expectation of further cash, so the company had an obligation to explain clearly the cause of delay. Sophisticated investors understand that big government projects inevitably suffer certain complications; if the company were simply open and honest about what is going on, all would have been forgiven.

(The most credible rumor I have received as to the true cause of the delayed cash is simply Malaysian government bureaucratic inefficiencies combined with, surprise surprise, poor communication between NBS and the Malaysian govt. I've also heard that some additional Malaysia cash has come in post June 30).

(3) With the recent announcement about potential future contracts, NBS has again ratcheted up short term investor expectations for 22 potential new contracts worth $billions. While it is important for the market to know that NBS has a strong pipeline of potential new contracts, the market doesn't need to know anything yet about the size, timing, and quantum of these contracts; if a good chunk of these contracts don't come in sooner rather than later, or if the ones that do come in are relatively small, many many investors will now feel disappointed. This will be particularly the case if the stock is trading on a high PE when the next contract win is announced. The company has now also given the media an opportunity to speculate on the contracts it hasn't won, rather than focusing on the fantastic contracts it has won. The way the last announcement was worded was a red flag to sophisticated investors that the company is prone to a bit of ramping.

Having said all of the above, I still have to rate the company a massive buy. Despite its terrible corporate communications, the fundamentals of this company remain excellent.

Because of the general market anxiety concerning cashflow (an anxiety created partly by bad corporate communication), my guess is that the company wont wait until the Dec 30 accounts to next update the market on the quantum of its cash holding. Rather, when NBS's cash is above a level that the company deems sufficient to finally convince the doubters, it will release a one-off announcement to this effect. (For competitive reasons, I suspect that the company will not want to make a habit of informing the market whenever it receives a substantial chunk of cash).

It would be my expectation that once the cash issue has finally been dealt with, the company will then embark on a belated roadshow.

Confirmation of sufficient cash will allow potential new investors/fund mangers to have a high degree of confidence in analysts $80mill+ FY10 NPAT forecast (a forecast that the company also deems realistic). This, in turn, will immediately focus peoples attention on the fact that NBS is currently trading on an FY10 earnings multiple of around 2.5, has two large 5 year contracts already locked in, has a strong pipeline of potential new contracts, has no debt, and is going to pay out 50% of its profit as a divvy. Given that the macro-economic environment is now stabilizing, and funds can afford to take on a bit of risk again, and given the increasing attention this stock is attracting in the media (for good reason!), full confirmation of the NBS story in today's environment could easily justify an immediate PE of 10-12.

On a fully diluted basis, an FY10 pe of 12 has NBS trading at $2.10 and well inside the ASX200.

So, assuming Dykes has learnt his lesson re kings cross benders (as I'm sure he has – haven't we all learnt this lesson by the age of 40?), this is where I see this stock heading once NBS is in a position to say to the market "we currently have a cash holding in excess of $30mill" (or whatever figure the company deems to be sufficient).