Ann: AHF to produce Organic Infant Formula with Australian Milk, page-165

Yes, and with that the day traders are having a field day. There are also substantial exist going on as well including very likely the Bell Potter suitors who bought in under the 25c loyalty options (underwritten shortfall by BP, 2 years back). They haven't seen this same price for almost 2 years, now. But, so, this may very well continue or it may go the same way as did the SP following the Dec15 CDC announcement, the greater proportion of which bought in between the 35c - 59c mark, so therefore are either still sitting on significant losses or have long since exited themselves).

The SP may therefore continue as it is doing but sooner or later it will have to be supported by fundamentals and not from recycling day traders.

If then this does actually represent the turning point for the Company, then, really, they should have come out with much more specific detail (to the Company than what they did (it was all generic detail). As such, there may very well be buyers on the prowl out there but likely, apart from BP, others will also likely be exiting. For example, last week's SSN cessation could very well have moved down to below 5% so therefore invisible now to anyone looking on the radar, but equally could very well have since then exited their holding whilst doubling their investment to date. So, there is very much more to see here than simply an SP that is being supported by an announcement but which really needs to wait on the more substantive detail to be released (in due course, as the saying goes).

So, in the absence of any of that detail being provided, let's hazard a guess at this.

If conservatively 8.5L can transform to 1kg of IF, then if 100% of AHF’s stated 17M/L milk production is allocated to the IF project, this could well translate to 2M KG of future IF being produced, assuming zero wastage, leakage or loss. In reality however a leakage factor of 20%+ should be allowed for, so reducing the final product scope to 1.6M KG.

The RP of IF is circa the $25 - $30 mark for typically 800g tins, grossing up therefore to between $31 - $37.50 on a completed basis. Typically, retail is double the wholesale price which in itself could well be +25% of the production price. So, therefore the $31 tins back down to somewhere between $12.40 - $15.50 (so, circa, $14). Likewise, the $37.50 tins back down to between $15 - $18.75 (so, circa, $17). Putt these together and the likely hybrid production price is circa $15.50.

All being well therefore, the prospective upside, revenue wise is therefore $24.8M, assuming the above parameters. But even if you change these to reflect nil wastage and a 2/3 share of pricing value, then the equation becomes circa $45M (but that’s with a very strong internalisation of everything including on a direct sell through basis).

The reason therefore that no numbers were mentioned in yesterday’s announcement is that the announcement whilst potentially positive for the future some several years out, is nonetheless at risk of being rangebound within the range of current revenue levels through to potentially double the current revenue position (at the very best).

Taking this then further forward and the question becomes, what of the future intended profitability? This of course is the $64 question but in reality, at best the net resulting margin would likely be 15 – 20% meaning, somewhere between $3.75M (at the low volume, lower margin end) - $9M (at the high volume, higher margin end). So, again, a potential midpoint of circa $6.4M which, on the basis of (*) 243M current shares = 2.63c per share @$6.4M (with absolutely everything else kept in sync) through to (*) 243M + 250M in new shares (@20c, for $50M in a CR) = 493M+ shares = 1.3c per share (ditto).

Applying then a 20x multiple (very generous, when in most circumstances, sub 15x would be the prevailing choice), the SP would max out @26c.

These numbers could very well be wrong but they represent a guess (my guess) at what things might be like assuming certain matters and assuming that production was able to be commenced with, today.

So, what's your position on the matter (and will you be around when they tap you for a CR?)?

That’s then the problem – with everything that yesterday’s announcement didn’t say or suggest. 17M/L is certainly a good starting point but from a future viability perspective, a very much larger collective than this will be required and that means either (*) an even bigger required CR, or a (*) very clear and apparent JV sharing dilution of future value.