PEB - Pacific Edge Ltd

[MAC]

Some may choose not to accept the forward revenue advice and goals of PEB, some may choose to reduce their valuations due to their personal risk perceptions. Some like myself prefer to separate valuation from risk and in doing so apply more orthodox fundamental analysis and methods, each to their own.

All companies retain risk, particularly so startup companies in their initial growth stage. As the market incrementally gains belief in company objectives the market perception de-risks and the SP rises toward fundamental valuation.

We’ve seen a lot of de-risking in 2013 and we may anticipate more in 2014 and 2015. We don’t all have to agree with the markets perception of risk, some will perceive less risk, some will perceive more risk, each to their own.

Here’s where I’m at based on valuation inputs readily available to the market and to all the fundamental analysts out there in the world. These are de-risked valuations for the US Cxbladder(detect) revenue stream only.

Base Case (HY18 NZ$100M in revenues): FY14 $1.70
Late Case (FY18 NZ$100M in revenues): FY14 $1.40
Early Case (HY17 NZ$100M in revenues): FY14 $2.30

The recent $20.5M capital raising intended to accelerate the revenue curve in my view could be a game changer and at this point in time, based on PEB management’s record of achieving schedule milestones very well to date, I’m inclined to appreciate the possibility of revenues coming forward and the possibility of an 'Early Case' arising. There are risks, I’m watching cautiously and will be the first to correct such a view if I see a forward misalignment.

It would seem to me that the market has recently revalued PEB correctly and the SP right now is about where it should be based on FA and the amount of de-risking seen throughout 2013.

I would not be surprised to see PEB as a $5 stock in FY16 if they meet their objectives.

Recommendation: DYOR

Base Case Valuation Assumptions:

a) Orthodox DCF methodologies applied, WACC 10%, PG 6.5% beyond FY18.

b) Cxbladder(detect) revenue goal of HY18 NZ$100M, Ref: PEB 2013 capital raising cover letter, (note 1).

c) Gross margins (sales less COGS) of 81%, Ref: PEB Capital Raising to Deliver Cxbladder to the US, July 2011.

d) I’ve applied a similar Cxbladder revenue rate of growth to that of Harbour Asset Management: Ref Australasian Equities Monthly Commentary, 07 November 2013. http://www.harbourasset.co.nz/wp-con...ry-website.pdf

e) The valuation includes revenues associated with US Cxbladder(detect) sales only, (note 2).

f) The US lab is rated at 4000 tests per week or the equivalent of US125M in revenues p.a. Therefore, no significant capital outlay is required for the US cxbladder(detect) revenue stream prior to HY19 on the Base Case schedule.

Note 1: There has been some contradiction from the media over the last six months suggesting the five year goal as being gross revenues of US$100M with the presumption that this represents (US$ sales less US$ COGS). More recently PEB have documented the goal within announcements and within the 2013 capital raising documentation as being sales of NZ$100M, conservatively I’ve elected to use the lower of the two, this being HY18 revenues of NZ$100M.

Note 2: Several further revenue streams are scheduled to commence in 2014 and 2015, however these in my view are yet to be quantified adequately enough to include within the valuation at this time. I'm hoping for further information to arise in 2014 that will allow the inclusion of the following revenue streams: Australian Cxbladder(detect), Spanish Cxbladder(detect), US Cxbladder(triage), US Cxbladder(predict). The inclusion of these revenue streams will further increase the valuation of PEB.

[barney]

They appear to have heard of it down south.

https://www.bcbsnc.com/content/servi...2013-12-10.htm

[clip]

Description section updated to include new test "CxBladder." "CxBladder added to the "When not Covered" section.

Not entirely a bad thing I would think? Initially if not covered by insurance then CXBladder may be cheaper than cystoscopy/other tests so patients may be more likely to select when presented with options. As we get more insurers on-board this may change to covered whereby the hospitals/insurance companies may try to push it as it saves them money as well? win/win

[Dentie]

[QUOTE=Balance;450193]

All good, Dentie.

Traders will be traders, afraid of missing out but nervous as hell because they do not share the belief in PEB?

Correct Balance. Traders need something to trade with. I expect they desire smooth price movements (in both directions) over, preferably, as shorter time period as possible. The money is made by either the velocity of the trades (for traders) or the ever increasing SP (for investors). I'm not sure PEB is a classic trader's stock at the moment - due to the jerkiness and unpredictability of the SP.

For PEB, in hindsight (of course), the good traders would have been out between $1.50 & $1.60 - after getting in at around $1.20. The "self named" traders who are still in at the moment are really only "tail chasers" ... or they could be investors but just don't know it? Or, they could be providing the liquidity for those that want to get out.

[Balance]

[QUOTE=Dentie;450236]

Correct Balance. Traders need something to trade with. I expect they desire smooth price movements (in both directions) over, preferably, as shorter time period as possible. The money is made by either the velocity of the trades (for traders) or the ever increasing SP (for investors). I'm not sure PEB is a classic trader's stock at the moment - due to the jerkiness and unpredictability of the SP.

For PEB, in hindsight (of course), the good traders would have been out between $1.50 & $1.60 - after getting in at around $1.20. The "self named" traders who are still in at the moment are really only "tail chasers" ... or they could be investors but just don't know it? Or, they could be providing the liquidity for those that want to get out.

One does not sense any courage of conviction by the traders here. They are nervous as hell about a few cents movement.

[Whipmoney]

Here’s where I’m at based on valuation inputs readily available to the market and to all the fundamental analysts out there in the world. These are de-risked valuations for the US Cxbladder(detect) revenue stream only.

Base Case (HY18 NZ$100M in revenues): FY14 $1.70
Late Case (FY18 NZ$100M in revenues): FY14 $1.40
Early Case (HY17 NZ$100M in revenues): FY14 $2.30

The recent $20.5M capital raising intended to accelerate the revenue curve in my view could be a game changer and at this point in time, based on PEB management’s record of achieving schedule milestones very well to date, I’m inclined to appreciate the possibility of revenues coming forward and the possibility of an 'Early Case' arising. There are risks, I’m watching cautiously and will be the first to correct such a view if I see a forward misalignment.

Base Case Valuation Assumptions:

a) Orthodox DCF methodologies applied, WACC 10%, PG 6.5% beyond FY18.

b) Cxbladder(detect) revenue goal of HY18 NZ$100M, Ref: PEB 2013 capital raising cover letter, (note 1).

c) Gross margins (sales less COGS) of 81%, Ref: PEB Capital Raising to Deliver Cxbladder to the US, July 2011.

d) I’ve applied a similar Cxbladder revenue rate of growth to that of Harbour Asset Management: Ref Australasian Equities Monthly Commentary, 07 November 2013. http://www.harbourasset.co.nz/wp-con...ry-website.pdf

e) The valuation includes revenues associated with US Cxbladder(detect) sales only, (note 2).

f) The US lab is rated at 4000 tests per week or the equivalent of US125M in revenues p.a. Therefore, no significant capital outlay is required for the US cxbladder(detect) revenue stream prior to HY19 on the Base Case schedule.

Hi MAC, firstly thanks for your contribution as always, its good to have healthy debate with those who know a heck of a lot more on this topic than myself.

I'm just curious but why would you use a long-run (terminal) growth figure of 6.50%? To me that seems overly agressive given that US population growth is circa 0.8% and that the world population growth is around 1.14% per annum are you suggesting that there is a circa 5.7% (annual) increase in the incidence of bladder cancer worldwide (i'm not criticising this i'm just ignorant on the actual BC statistics)?

Secondly, I presume you have used a terminal value out to perpetuity which is standard in DCF analysis but just wanted to question whether this is realistic or not? At a guess I would suspect at most this product is only likely to have a 20-25 year lifespan given the continual evolution in modern medicine. Foreseeably a better test will come along (maybe a better biomarker or whole new diagnostic technology) and as such its likely that a large of the Market Cap value you have calculated is built into the terminal value to perpetuity rather than simply discounting 20-25 years of expected sales.

[gv1]

Whipmoney - the one lesson I learnt from Xero's phenomenal story is that while the investment wasn't right for me because I didn't understand it, I did not seek to deride it. Rather, I acknowledged I couldn't understand it but that it was clear there was a strategy the company was executing well on, was well funded and had great leadership. That meant a lot, though I wasn't holding the stock.

I think PEB will be "the next Xero" in terms of a huge growth story, and I believe it to be well funded, with great leadership, and executing well on its strategy. Having down significant homework in understanding the company, I'm pretty confident about its future success.

Hi STC,
I couldn't agree more, a great company. Merry Christmas and happy New Year.

[Whipmoney]

Whipmoney - the one lesson I learnt from Xero's phenomenal story is that while the investment wasn't right for me because I didn't understand it, I did not seek to deride it. Rather, I acknowledged I couldn't understand it but that it was clear there was a strategy the company was executing well on, was well funded and had great leadership. That meant a lot, though I wasn't holding the stock.

I think PEB will be "the next Xero" in terms of a huge growth story, and I believe it to be well funded, with great leadership, and executing well on its strategy. Having down significant homework in understanding the company, I'm pretty confident about its future success.

Don't get me wrong, I think (and have said on multiple occasions) that PEB is a great company (and in all honesty I think it is a better investment than XERO) but don't equate my bearishness on the stock prices of both as a lack of understanding of their respective business strategies.

I get XERO's/Drury's business strategy and I believe I have a reasonable understanding of where David Darling is taking PEB. XERO has sales on the board, PEB has sold 3 units to date.

Putting XERO aside, what I don't get is why the market has priced PEB so far up its sales curve simply because it has had 3 announcements confirming it its now on the menu. When the market is already pricing a significant level of US penetration (at these prices) it slightly concerns me that when PEB announce their next sales report (which will likely show a few hundred units) that there will be a serious retracement as punters suddenly realise that these agreements don't necessarily equate to guaranteed sales.

That's just my view though and the odds are that i'm wrong as I was with Xero, as at the end of the day its the markets view that matters.

[Mista_Trix]

I take comfort by comparison.
Take XRO, DIL and PEB. Three very different styles of board and senior management. DIL have shown they don't know what they're doing, XRO massive personality, very optomistic, but how would he be if/when things do/did start going wrong. PEB, Darling seems to be a good mix of strategic thinker while also slowly getting greater market penetration, but not so pushy he wouldn't be able to mitigate his risks - which is a very real worry i have about XRO.

I like the style of this company, I believe in him, and if he believes its all going to task then that's fine for me, I like the way he operates, he seems calm and confident (but not cocky or over the top) in interviews.

I take my collection in this comparison.

[Whipmoney]

f The market is forward looking. VERY forward looking in this case!

Yeah with a Price/Trading Revenue (Unit Sales) ratio of 23,775x I believe you are right.

The market average for Biotech is 6.01x.