what is truth with nbs?

I’ve now had a look at the 21/8 financials, and I don’t like the smell of them. I dumped my NBS this morning at a 1% loss. Issues I have include:

One outstanding feature about that set of 21/8 a/cs is the treatment of goodwill in its various disguises: have a look at the 3, yes three, pages of notes on goodwill and other intangibles (pages 8 9 10) and try and unravel the contortions (I won’t use the word contrivances) and the accounting gymnastics used to ‘reclassify’ goodwill and similar items as ‘technical and contract rights’; as with all companies, the goodwill on acquisition is just that, but here they are reclassifying such value as ‘technical rights’ ; also, there are intangibles which appeared from nowhere including ‘reclassification of purchase options’ ie created by book-entry in FY09; this accounting for intangibles generally, without explanation, is not a good look.

Note 5 to the NBS accounts (page 7) which relates to trade receivables makes no specific mention of the high-value sale at year-end (AFR mentioned $42m, which would be a massive 60% of the year’s revenue, and I have seen another reference to $30m, which would be 42% of total sales for the year; also a reference to the sale being to one party, the Malaysian govt, but there is no information in the accounts). Whatever the amount and whoever is the customer, it represents a substantial distortion to any trend analysis of the company’s business and should have warranted a note of some description. The other main question I would ask re that year-end sale is: when was the expenditure incurred to generate that revenue (in past, current or future years)? it would be concerning if revenue has been credited 100% in FY09, with its associated development cost to follow in future years.

The 21/8 accounts include a USD$5m loan to, not from, a company in Hongkong, and was made in FY09; there is no revenue in the accounts which is described as or which would equate to interest receivable on a US$5m; the loan is hidden in such a way that you will not notice it; there is no explanation of the loan (one has to assume that it is a loan, and not capitalised expenditure associated with any particular transaction); lack of transparency is not a healthy sign.

FY09 NTA (page 3) at $54.3m ( including that $30m debtor) seem exceptionally low for a company with $billion expectations; and for a company with such a high turnover in its shares; and particularly for a company which raised fresh capital in FY08 and FY09 of $54.1m net of transaction costs (page 4); that fresh capital is now represented by some of the acquisition-goodwill in the accounts (now referred to as technical rights).

NTA as follows:
Cash 9.2
Year-end Debtor 30.8?
Other debtors 11.2
Property & Equipment 1.7
US$5 loan & other assets 6.7
Total tangible assets 58.8
Liabilities 5.3
NTA $54.3m

We should not forget that there is a stockbroker community in the stock exchanges of Malaysia and Singapore, with English as the language of communication; they are no less sophisticated in investment matters than those in Australia; they will have their eyes out for the main chance; and they have connections with Australian brokers; none of them, not one broker, Malaysian, Singaporean or Australian, appears to be pushing the NBS price and pe above present v low junk-stock levels. Interestingly, the Malaysian brokers should be familiar with the company/business acquired by NBS, and now represented as an asset in the NBS accounts and described as goodwill or technical rights.

All in all, something’s not right about NBS, which may be partly a function of the appalling NBS communications style, and partly their accounts, but there’s something more, including the way it seems to do its business.

Some positives for those who want optimism: I note that Orbis Inv Mngmnt recently filed two changes, firstly moving from a 6% shareholding to 7% and then to 9% with purchases in August and September (to me that is the only positive aspect I can find with NBS); S&P have now included NBS in the ASX 300, so that will bring in buyers; I’m ambivalent about the significance of the 500,000 share purchase transaction in FY10, by the new CEO.

The company has NTA of approx $50m (as it should after raising $54.1 in FY08 and FY09). NBS should continue to produce revenue and profits, but I don’t want the roller-coaster ride.