PAZ Pharma Zen

[DarkHorse]

Better than I expected too. While the gale force headwinds they've faced have reduced short-term profits, the fact that they still made a $2.3m profit, while also significantly ramping up productive capacity, to meet ongoing unmet demand for their products to boot, has actually increased my faith in the business and its resilience.
Once all the added capacity is in place, there should be tremendous operating leverage and cashflows once conditions normalise.

[Beagle]

I'm surprised everyone seems pleased with that EDITDA result which is a massive reduction ($6.7m EBITDA falling to just $2.3M is a massive fall), on the previous year, (challenges notwithstanding).

I know everyone is holding for future growth but...I can't help observe that some people appear to be making the mistake of misinterpreting EBITDA for profit. Earnings before interest tax and depreciation of $2.3m is not net profit and last year net profit was $1.5m lower than EBITDA. I would expect more than $1.5m in expenses and depreciation below the EBITDA line this year with more plant and equipment (capital raise costs are another sperate thing entirely), but sticking with $1.5m in expenses and depreciation below the EBITDA line as per last year my back of the envelope calculations suggest about $800K profit before tax or just on $600K after tax which equates with the higher number of shares on issue to just 0.24 cents per share. PE appears to be be a whopping 250 !!

The company makes a fair bit of noise about the second half performance being much better so what do the metrics look like if we annualize the most recent half's performance ?
Annualizing the second half EBITDA result of ~ $1.5m would suggest annual after tax earnings of about 0.43 cps, much better than above but still trading at 140 times annualized most recent half trading performance. WOW, that's quite some PE ! This suggests to me that several years, perhaps even 5 years, of expected future growth is already baked into the current share price. (When I originally invested at 20 cents when they were growing earnings they were on a forward PE of only 20 times earnings so the metrics are certainly very, very different today). One could of course argue that their growth prospects are better now than they were in the past but I think their growth prospects were pretty good a few years ago so maybe the current metrics are far too stretched...it seems that way to me.

Actual earnings, (if any after capital raise costs), will be revealed with their annual report shortly.

What's abundantly clear is they face a human resource crisis in this labour intensive industry and 20% staff vacancy rate with current modest staff needs is an extremely serious situation. Its all very well to be building significantly more processing capacity in the years ahead but where on earth are they going to find the staff from if they can't even staff their current processing machinery's needs ? To me I see no solution other than to dramatically lift pay rates to attract the necessary staff and this surely begs the question of how serious is the impact on future profitability ?

For my money, I think the private equity guys paid about the right price (40 cents) at that time but the challenges the business has faced and continues to face with labour shortages, shipping and installation challenges and delay's are probably a lot worse than they or anyone else were expecting at the time so fair value now is probably below the 40 cents they paid. That's how I see it and I am sure others see it differently and that's fine.

We are seeing a real reckoning unfolding overseas with high PE stocks generally and more specifically in the tech and biotech area's.
Higher risk free long term bond rates are really caustic to valuations on these sort of stocks and I see the USD ten year rate leapt up yet again on the US market our time this morning. Against this backdrop the metrics noted above are exceptionally challenging for PAZ so I will remain on the sidelines for the foreseeable future until such time as realistic pricing for future growth emerges. I foresee 2022 being another extremely challenging year for PAZ. Maybe they can get back to 1.0-1.5 cps earnings in 2023, which if possible is still considerably lower than 2020 (1.7 cps).

[percy]

I'm surprised everyone seems pleased with that EDITDA result which is a massive reduction ($6.7m EBITDA falling to just $2.3M is a massive fall), on the previous year, (challenges notwithstanding).

I know everyone is holding for future growth but...I can't help observe that some people appear to be making the mistake of misinterpreting EBITDA for profit. Earnings before interest tax and depreciation of $2.3m is not net profit and last year net profit was $1.5m lower than EBITDA. I would expect more than $1.5m in expenses and depreciation below the EBITDA line this year with more plant and equipment (capital raise costs are another sperate thing entirely), but sticking with $1.5m in expenses and depreciation below the EBITDA line as per last year my back of the envelope calculations suggest about $800K profit before tax or just on $600K after tax which equates with the higher number of shares on issue to just 0.24 cents per share. (PE 250)

Annualizing the second half EBITDA result of ~ $1.5m which was about double the first half, would suggest annual after tax earnings of about 0.43 cps, much better than above but still trading at 140 times the most recent half financial performance. This suggests to me that several years, perhaps even 5 years, of expected future growth is already baked into the current share price. (When I originally invested at 20 cents when they were growing earnings they were on a forward PE of only 20 times earnings so the metrics are certainly very, very different today). One could of course argue that their growth prospects are better now than they were in the past but I think their growth prospects were pretty good a few years ago so maybe the current metrics are far too stretched...it seems that way to me.

Actual earnings, (if any after capital raise costs), will be revealed with their annual report shortly.

What's abundantly clear is they face a human resource crisis in this labour intensive industry and 20% staff vacancy rate with current modest staff needs is an extremely serious situation. Its all very well to be building significantly more processing capacity in the years ahead but where on earth are they going to find the staff from if they can't even staff their current processing machinery's needs ? To me I see no solution other than to dramatically lift pay rates to attract the necessary staff and this surely begs the question of how serious is the impact on future profitability ?

For my money, I think the private equity guys paid about the right price (40 cents) at that time but the challenges the business has faced and continues to face with labour shortages, shipping and installation challenges and delay's are probably a lot worse than they or anyone else were expecting at the time so fair value now is probably below the 40 cents they paid. That's how I see it and I am sure others see it differently and that's fine.

I am sure short term traders will agree with you,while long term investors will not.

.

[Beagle]

I am sure short term traders will agree with you,while long term investors will not.

.

Some time back early last year I vision casted a formulated scenario whereby they could possibly generate 3 cps in earnings within three years of this new investment program. I worked out what I though was a fair PE of those earnings three years hence and discounted that back at my required rate of return for a low liquidity, non dividend paying, unlisted investment in this high risk biotech industry and arrived at a fair value of about 47 cents early last year, which is I why I sold out when the price was ~ double that.

Now I foresee it taking them 5 years to build up to that level of profitability, (Covid pushed them back 2 years I think that's a fair comment by Iceman) but we're one year down the track now so four years hence from now they might make 3 cps, (depending upon how critical the human resource challenge is and what the pay rate implications are in addressing that). This could be worth ~ $1 four years from now...or maybe the extent and severity of the human resource cost challenge means it takes even longer to grow earnings to 3 cps ?

Maybe in 5 years they're worth 30 - 35 times 3 cps = $1 ? maybe less, may be a bit more. Predicting the future that far out is very difficult ! Five years forward is at the limit of my ability to assess what might happen. If people are more patient than 5 years, good for them but for my money with no dividends likely anytime soon I fail to see how this makes the cut of a compelling investment case at present at the current price and considering the truly extraordinary current metrics. For my foreseeable investment horizon, as a short term trade or a five year plus investment this looks like a high risk and extremely expensively priced investment. I'm a value investor and I will pay for growth but the PE needs to be realistic. It was when it was 20 cents and the forward PE was 20, (thanks again for bringing this to my attention), but its certainly not now.

[winner69]

Didn’t realise Peter Dobbs is a Director

[percy]

Didn’t realise Peter Dobbs is a Director

Yes a member of an incredibly talented board.
Also has a large shareholding.
Been aboard for a few years now.

[couta1]

I am sure short term traders will agree with you,while long term investors will not.

.

Best to ignore "White Noise Barking"

[iceman]

Best to ignore "White Noise Barking"

Fair enough for him to come and repeat what he has said before. I think those of us that invested in this are aware of the issues and that we are looking at long term horizon that has been pushed further out with the COVID issues hampering progress. It is totally understandable this is not for short term traders like Beagle and I respect his view. Each to their own.

[couta1]

Fair enough for him to come and repeat what he has said before. I think those of us that invested in this are aware of the issues and that we are looking at long term horizon that has been pushed further out with the COVID issues hampering progress. It is totally understandable this is not for short term traders like Beagle and I respect his view. Each to their own.

I think posts number 814&815 (P82)sum things up nicely. Lol

[winner69]

Yes a member of an incredibly talented board.
Also has a large shareholding.
Been aboard for a few years now.

Share register has some interesting and familiar names on it ….even on the first page

Smiled when I saw two bowling club guys are shareholders …..they hadn’t told me …keeping all the good stuff to themselves