Probiotec 1H07 result - its all in the accounting

Probiotec released 1H07 results today - its first results presentation as a listed company. As shown in the table above 1H07 results were well up on every line on 1H06 but as I did for PWK's result comparing PBP's 1H07 result against 2H06 is more instructive. The results are less spectacular compared to 2H06. Total revenue up 8% just ahead costs up 7.7% leading to an increase in EBITDA of 10% on 2H06. However EBIT and NPAT were both down -9.5% and -14.3% respectively on 2H06 and this is where it gets interesting.

As is usually the case the most interesting numbers are in the notes to the accounts. You'll notice the very low depreciation charge in 2H06 that gives a higher EBIT and NPAT than 1H07. That's because during 2H06 PBP decided to change their accounting policy with regard plant & equipment changing the depreciation period from 5-20 years to 8-20 years. What does this mean? Quite simply depreciation charges will be lower helping the P&L look more healthy. So what you say, depreciation is a non-cash charge and what is really important is the replacement cost of plant and equipment. Exactly, and as it is usually wise to assume that replacement cost will be more than the historical cost on which depreciation charges are based do you think it would be a more accurate reflection of replacement cost to reduce depreciation charges? Absolutely not.

Also of note is the 14% increase in intangbles amounting to $0.8m of product development costs that have been capitalized and treated as internally generated goodwill. Now I'm not against capitalizing expenses, it can be completely justified and PBP has demonstrated it can generate profits from product development in the past but it is something that should be noted and kept a close eye on.

Operating Cashflow was reasonable at $2.2m and Debt to Equity reduced to 64% from 87% pre-listing. It will be interesting to see if the company continues to pay down debt with operating cashflow, the answer to that will depend on capex going forward. I will be firing off a list of questions for management tomorrow to get answers to these and other questions. Looking ahead the company reiterated both in the 1H07 report and the investor presentation that 1H07 results were in line with expectations and that they are confident of meeting prospectus forecasts via strong sales growth from a range of new products and a fulll contract manufacturing order book coupled with cost containment. The table below gives the implied results of 2H07 needed to achieve prospectus. It calls for a 27% increase in revenue an improvement in margins and no less than a doubling in NPAT from 1H07. Quite a tall order.


In conclusion management is making all the right noises its the numbers that aren't. Pending the responses I get from management I will have to consider whether or not to liquidate my paltry holdings or wait to assess the full year result.