Where has the passion gone?, page-3

The quarterly should be fine as there was $17 million in receivables at 31 Dec and only $2.3 million was received in cash in the March quarter. So even given the lags in payments in China of up to 180 days there should be $15 million in cash coming in the June quarter from the receivables at the end of December, unless the bills overdue have leapt. Costs could be $7-8 million (including some spending on the new factory). The cash inflow in the June quarter should therefore offset roughly the cash outflow of $6.5 million in the March quarter. That occurs from receiving as cash in the June quarter, accounting revenue that was from work done in the 2019 year. I assume virtually nothing will be received in cash in the last half year from work done in the half year given the lags in payment.

However that cash balance for the last half year will be misleading in terms of the accounting profit and loss for the half year. It seems unlikely that we will receive even $10 million from work done in the last half and invoiced. It could well be much less.

The revenue forecast for the full year is only $30-40 million and very little work was done in the last half. The international projects were delayed and the major Chinese projects were only due to start in May and then were suddenly delayed.

So for the profit report at the end of August there could be only $10 million in revenue at best in the first half, mainly in receivables.

Operating expenses would be $5 million (if the gross profit is 50%) and overheads $6 million (half the total on page 29 of the AGM presentation).

Added to that loss of $1 million, inventory was built up as it was assumed sales would jump from May in China. The Chinese plant was operating flat out in the June quarter so presumably produced 5000 tonnes. We know from presentations that at the end of March there was already inventory of 2500 tonnes worth $7 million in sales. Even assuming sales of 3000 tonnes in the half year the inventory at 30 June is likely to have been 4500 tonnes. The cost of producing that extra inventory is unknown but includes purchase of raw materials, transport and running the plant. Assuming that is $750 per tonne (ie 25% of the sale price with another 25% due to transport and application of the product) the cost of producing inventory worth 4500 tonnes is over $3 million.

I therefore assume an accounting loss for the half year of at least $4 million.

The management dilemma is do they assume the Chinese projects are about to start again soon? To reach the annual sales forecast for 2020 we need sales of 6500 to 10000 tonnes in the second half of the year. That means at the top of the range the plant may need to keep operating flat out. However, if there are substantial further delays in starting Chinese projects, the plant production could be slowed down. If the doubled capacity is available by the end of the year (as planned) then the higher production of 40000 tonnes could produce annual revenue of $120 million in 2021. There would seem to be no need to build up inventory in the current half year for use in 2021. In fact you would wonder if the expanded capacity is really needed anytime soon, as tripling revenue in 2021 seems unlikely.

What we do not know is the real reason for the delays in the Chinese projects. There was no second covid wave in the south of China, so have the local authorities just become less keen on the projects and used covid as an excuse? If so when will they start? If they were just being cautious about possible covid problems, then the projects should surely be starting now. Hopefully the quarterly will clarify, but having been a shareholder since 2011 and made large profits, I feel safer on the sidelines.