In Nov 2007, MTU forecast NPAT for 07/08 to be 4.7m to 5.1m,...

In Nov 2007, MTU forecast NPAT for 07/08 to be 4.7m to 5.1m, indicating EPS of around 6 to 6.5c per share. As the release says “M2's consolidated EPS is expected to increase by close to 50% or 2.9 cents per share.”

Do the sums and you get revised EPS forecast of around 8.9 to 9.4 cents per share. As I write, MTU shares are 80c, indicating a PE of 8.5 to 9.0. To return to the pre announcement PE of around 12.5, the share price must rise to around $1.10 to 1.17 (around 40%).

Note the CEO is thus today re-affirming the Nov 2007 forecasts. This suggests their half year report yields few downsides. MTU also trades with at least a 1c interim dividend.

So what does all this have to do with CDR you ask?

1. Questions have to be asked whether CDR got fair value on the asset sale. Its reasonable to believe the odds were against them. It is not sufficient for CDR to simply make asset sales. They have to be at the right price. If they are not, there is downside share price risk.

2. The downside on CDR is 100% if it goes into administration. The upside might be 100%, but that is unlikely in the short term given the particularly nasty half yearly report coming. From a net profit perspective it is reasonable to expect the figure will be highly negative.

3. In the next 3 – 4 weeks is MTU a better investment than CDR on a risk return basis? IMHO the answer is yes.

I sold $50K of CDR, buying MTU at the opening today. It’s a small stock and the information will take time to get out. Thus it has only risen around 5% so far. I took a small loss to hopefully make a bigger gain.

I have read every thread on CDR for the past six months. Many have been putting entirely logical reasons as to why they have caught the falling knife. Yet it has continued to fall. I will re-evaluate after the half year report release. On a risk return basis, it seems to be the sensible thing to do, especially as it has not performed as I expected.

A lot has been made in recent threads regarding bankers supporting CDR. The fact they indicate debt only needs to reduce by $85m before dividends could resume was initially a positive to me. They are saying, based on the numbers they have been presented (and which we have not seen), CDR is capable of sustaining $250m in debt. However, a word of caution. Think about what a bank wants to see happen and what metrics a banker applies to a company. They are totally different to those of an unsecured equity provider. I strongly oppose EBITDA as a measure of profitability. Capital is not free!!!

I'm particularly interested if you think I've made the wrong decision and why. All comments welcome

DYOR and good luck.