lodge retains buy recommendation

Lodge sent the following note out to insto clients at around 11am on Friday:

Additional cash has been received since 30 June
Government debtors are considered to be low risk and the company sees very little risk to the collection of receivables
The implementation of both the Malaysian Immigration contract and the China Gas Tank project has gone very well
Underlying EBITDA margins (excluding options expense and D&A) are >80%
There remains a strong pipeline of demand for the NexCode technology
The Vietnam deal is out to tender and NBS is in a strong position to win in FY10
We will retain our FY10 NPAT forecast of ~$80m
In summary, we expect operating cashflow to improve significantly in 1HY10 and the pipeline of demand remains solid
NBS is trading on an FY10 PE of 2.4x, therefore we retain our BUY recommendation

Ousia's comments:
Lodge has reduced its FY10 NPAT forecast from $100mill to $80mill to reflect the stronger AUD.

TBE is quite correct that NBS has now become a play on whether punters think that the Malaysian and Chinese governments are reliable debtors. The key point here is that no Malaysian or Chinese invoices are past due, so we have no fact-based reason to doubt these debtors.

Assuming Malaysia and China are reliable debtors, NBS is currently worth 3 or perhaps even 4 times its current value, so the market hysteria surrounding Malaysia and China in particular has created a unique risk-reward proposition. NBS is a massive buy if you think Malaysia and China will pay, a sell if you think they wont, or hold if you are not sure.

NBS received its first payment from Malaysia on or around June 15, so punters and analysts should have figured out that there would be no further Malaysian payments in the June 30 accounts. Assuming a 60 day billing cycle for Malaysia, NBS would have received its second payment from Malaysia on or around August 15. NBS management confirmed this payment to analysts on Friday at around 11am, hence the afternoon price recovery.

It is my understanding that China is on a longer, 90 day billing cycle, with the first significant payment due soon. Again, there is no rational or fact-based reason to doubt that the first significant China payment will occur on time.

It was a significant oversight on behalf of NBS management not to put out a note on Friday saying they had received cash post June 30 – I'm sure the fall at opening would have been avoided if they did.