A lot of holders who had been stuck with MSB for the past few years wish that one day MSB will be able to go back to $10.
As already been discussed in the past, a lot of things have to go according to plan for MSB to achieve this lofty goal. Based on MSB's recent lacklustre form, one has to be super-duper optimistic to still believe that this goal is achievable.
For the purpose of quantifying this goal, let's do some analysis and put some numbers around this goal of reaching $10.
MSB currently has approximately 380,000,000 shares on issue.
If one day the share price returns to $10, the market cap of MSB will be 380,000,000 x $10 = $3.8 billion.
What P/E ratio should we assign to MSB if this scenario happens? Well, we can look at the P/E ratio of another successful healthcare company, CSL. CSL that has multi-decade track record of growing revenue and profit is trading at a P/E ratio of around 30.
Let's be generous and assign the same P/E ratio to MSB, who is actually nowhere near as financially stable as CSL. We can now work out what yearly earnings MSB has to produce.
NPAT = $3.8 billion / 30 = $127 million
This figure, $127 million is not revenue, it's net profit after paying for all expenses, such as wages, rentals, R&D expenditure, marketing, etc.
How much revenue does MSB have to produce to be able to earn NPAT of $127 million per year? Is it $250 million? $500 million? $1 billion?
Personally, I have no idea.
Instead of arguing with others who don't share the enthusiasm towards MSB as an investment, holders should spend their valuable time thinking about the above question and try to answer it themselves.
Now, one needs to ask oneself:
- How is MSB going to go from where it is now to a position where it's earning $127 million per year?
- How much money is still to be spent to reach that position?
- How long will it take to get there?
Now, let's go further and imagine how much more difficult for MSB to reach this goal if the equity financing facility with Kentgrove is activated.
If MSB goes ahead and raises $120 million over the next 3 years, how many more shares will be issued? Let's consider 3 possibilities involving 3 different share prices:
1. Average price of new shares issued is $2.00
Number of new shares = $120 million / $2 = 60 million
Total number of shares = 380 million + 60 million = 440 million
Market cap @ $10 = $4.4 billion
With P/E of 30, NPAT per year = $4.4 billion / 30 = $147 million
2. Average price of new shares issued is $1.00
Number of new shares = $120 million / $1 = 120 million
Total number of shares = 380 million + 120 million = 500 million
Market cap @ $10 = $5.0 billion
With P/E of 30, NPAT per year = $5.0 billion / 30 = $167 million
3. Average price of new shares issued is $0.50
Number of new shares = $120 million / $0.50 = 240 million
Total number of shares = 380 million + 240 million = 620 million
Market cap @ $10 = $6.2 billion
With P/E of 30, NPAT per year = $6.2 billion / 30 = $207 million
As these examples have demonstrated, if the ATM machine is one day turned on, the lower the average issued price is, the harder it is for MSB to go back to $10. This is simply because the financial hurdle that it has to pass gets higher and higher as more and more shares are issued.
On 1 July 2016, in its latest announcement regarding the Kentgrove agreement, MSB said that it still has $80 million in the bank. At the daily cash burn rate of $175,000, in the 12 days since, MSB had already chewed another $2.1 million, and the cash balance is now only $77.9 million. Even as I type this post, MSB's cash balance has gone down by another thousands of dollars.
For a company with little revenue and a lot of expenses still to be paid, the thought of this is actually quite frightening.
If any of the trials' results is negative, then MSB will be in a deeper hole. And if the hole is deep enough, MSB might never be able to climb out of it.
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