Did you read the Dlouhy report Puma?......March 27, 2003
During the quarter, NHC repaid its $1M bridge loan to members of management and a third
party investor, and extended its preferential payment terms with its main supplier, Oki
Electric of Japan. The company also concluded the sale of its video product line through a
management buyout for total net proceeds of $500K, including $300K paid on closing and
$50K per quarter between Q4/03 and Q3/04. The cash balance stood at $2.7M, giving NHC
between three and five months of cash, assuming the burn remains at the Q2 level of about
$2M/quarter. The company is currently trying to secure an operating line that should provide
it with sufficient liquidity until it becomes cash flow positive.
Despite the slow start to the year, we remain confident that Verizon will ultimately resume
ordering more ControlPoint units from NHC, especially as technicians become more familiar
with the installation process. However, we have substantially reduced our order forecast for
the balance of FY03 and FY04, to reflect the continued uncertainty in telecom capex spending.
Despite the completion of the OSMINE process for Telcordia FOMS (Frame Operations
Management Systems - flow-through provisioning), we have yet to see any volume orders from
BellSouth. As a result, we are completely removing this customer from our order forecast.
This is not to say that BellSouth will not deploy ControlPoint on a large scale at some time in
the future, but it is an acknowledgement that predicting the timing of such an event is
exceedingly difficult. Main distribution frame automation is clearly a low-priority objective for
BellSouth, which is unfortunate, since we estimate that the company would have already
realized a complete return on its investment by now if it had begun to deploy ControlPoint
when the contract was first announced at the end of 2000.
We still believe that Verizon alone could account for over $70M in orders per year, once all
installation issues have been resolved. Add to that the potential that Bell Canada and other
ILECs represent - which we have not assumed in our forecast – and the upside potential
remains quite attractive. However, the risk that orders could slip anywhere from a quarter to a
year remains extremely high, and our previous estimates no longer seem conservative. We
have therefore tried to be more realistic in our expectations and have substantially reduced our
expectations for the next two years. This pushes profitability out to FY05. Applying a P/E
multiple of 15.0x to our new FY05 EPS estimate of $0.07 yields a new 1-year target price of
$1.05. While this still represents an upside potential of 70% from yesterday’s close, the
balance sheet risk is high, with a funding gap of $5.0M in Q4/03. As a result, we are revising
our rating from Buy to Hold.
NHC
Communications
(NHC-TSX)
While the information in this report cannot be guaranteed, it was obtained from sources believed to be reliable. Dlouhy Merchant Group Inc. and/or its officers,
directors and employees may, from time to time, acquire, hold, or sell a position in the securities mentioned herein. Dlouhy Merchant Group Inc. may provide
financial advisory, investment banking, or other services for the companies mentioned in this report.