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This post was originally posted by DS on 21/05/11.




ds
Post #: 6741605
Price at time of posting: 8.6c
In Reply to msg: #6741552
IP: 122.106.xxx.xxx
Sentiment: LT Buy
Disclosure: Stock Held
Views: 3773


This is a very odd share in the sense that it has a single product as its main offering but the applications are endless.

I think this stock is likely to trade on it's potential value for a couple of years before settling down to a boring dcf valuation stock.

What I mean -

at the moment it's valued is between $50-100m based on a small cash flow stream from existing sales but not enough to cover costs (yet). The other value is tax losses and cash in bank but any way you strech your numbers it might be $15-$30m of tangible value at the most so the rest is potential.

If we sign 1 to 3 $1m per year customers this year then the company becomes cash flow positive which attracts a different group of investors and maybe it will be valued in the 10-20c area - again more for it's potential but as the cash flow has derisked it investors feel safer to hold and sell supply dries up.

If we signed 5 or 10 of these little ones then the underlying cash flow starts to put a floor valuation in around the 10-20c area because the cash flow supports the PE multiple but the potential is still out there so most like the SP is actually 20-30c+ again based on the potential over and above the underlying cash flow.

If they sign one of the big deals though it will start behaving erratically - people will try to guess the cash flow consequences (big guys are pretty tough on the diclosure of royalties etc) but we can presume that 1 of these signatures is a $5m or $10m or more cash flow FOR EACH PRODUCT that uses Mix&Go. At first it will probably be a single product but there will be attempts to use it in multiple applications and to start new ones that up till now have failed.

This scenario could get even more exciting if someone wants to monopolise the technology because my understanding is the company is avoiding exclusive deals as they know how luctrative it will be clipping everyones ticket AND how beneficial to the industry it will be if every lab is playing with Mix&Go to improve results.

They only way under these circumstances to gain exclusivity to the technology would be to buy the whole company. A very low probability at the moment but something investors should be aware of ie if a bid is ever made for ADO under no circumsances should you be tempted to sell on market early - I will be waiting to see who else shows up first.

The non takeover scenario but major player taking up the non exclusive agreement could see 20c 30c 40c spikes and heavy falls and new highs as the lack of tranparency confuses people. At these prices we open up a new set of investors that are my favorites as the are the first group that can become hold forever investors - they sit on the fringe on the ASX300 crowd and try to get early holdings of stocks of the futures indices and they don't sell - they transfer into larger funds later at higher prices.

These are they guys that take a stock like ADO from a $200-400m market cap to the one that can only be justified by cash flow and gets boring eg if ADO achieves all this and is earning NPAT of $50m in 5 years time and is still signing new clients and has developed further applications or products they will have it valued at 20x the $50m based on it's potential or over $1 per share BUT if it's is only making $10m NPAT from the 20 bead manufacturers that signed up and has been rejected by the big boys and has no upside then they will value it at 10x PE and the market cap will equate to a SP till in the 10-20c range.

A long answer but I hope it goes some way to explaining how I think about this company. Most would not remember but when I first showed up on the ADO thread I said I was looking for traded biotech options and ironically I see ADO heads as a bit of an option on something I don't know how to value accurately and don't expect to be able to value accurately for at least a couple of years.

I don't have a target as I think it could be worth anything between 5c and $1+ depending on what happens. I will sell some when I believe the SP overvalues the potential risk reward equation. Right now with every thing we know and no announcements that price is probably somewhere between 15-20c but if new comes out or time passes and we get closer to multiple signatures then that number will move.

Sum it up -

Right here, right now it cheap under 10c, indifferent between 10-15c and expensive somewhere above this level.

Thats my humble but also arrogant opinion and my money is well and truly where my mouth is.

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Just remember - when the smoke clears, all you are left with is the mirrors.

21/05/11 13:17 (View) Back Post Reply (