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blue horseshoe

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blue horseshoe

Re: None

Monday, 04/24/2006 1:46:29 AM

Monday, April 24, 2006 1:46:29 AM

Post# of 5941
excellent valuation post:

By: longbow70

I was puzzled by the huge jump in INSQ in recent days, besides the growing interest over Ethanol, but after running through some numbers, I realised what the excitement is all about.

Check out the numbers and tell me if I'm off base...

From the news release on the link between INSQ and Verasun,

http://www.greencarcongress.com/2005/08/inseq_to_manufa.html

we see that INSQ will manufacture for Sunsource BioEnergy (the JV that Verasun set up with other Ethanol producers) at least 30 systems worth $1 million each over the next 24 months. I actually expect this number to rise beyond 30 (look at the rise already in orders from Veridium from $2.2 million to $3.7 million to $5.2 million, all in the space of a few weeks), but to be conservative, lets just use 30 systems manufactured over 2 years. That would mean 15 systems a year. At $1 million each, that would bring in revenues of $15 million for INSQ in 2006 and 2007.

Now, add in the revenues from Veridium - $5.2 million of systems sold to them from June 2006 onwards - and we get a total of at least $20.2 million for 2006 just from the manufacturing of ethanol producing systems alone.

Using a conservative profit margin of 20%, that would translate into profits of $4 million. Assuming an OS of 5 billion, that would translate into EPS of 0.0008.

At a P/E of 30 (reasonable valuation for companies in a fast growing sector), that would equate to a target price of 2.4 cents.

Alternatively, we can use discounted intrinsic value analysis to value INSQ. Assuming a constant sale of 15 systems every year to Sunsource, who needs to meet fast rising demand for Ethanol with the move from traditional fuels (like the gasoline addictive MBET that was mandated by the government recently) to Ethanol, this is a conservative estimate. I actually expect the systems sold to rise as more and more companies start to sell Ethanol and need to buy more Ethanol manufacturing systems from INSQ (Veridium's orders have already expanding, resulting in a rise in orders for INSQ ethanol manufacturing systems). So we can expect orders to rise by around 5% annually over the next 3-5 years. So using a discounted cash flow method, and a 30-year long bond rate of 8%), we get 0.0008/(0.08-0.05) = 2.67 cents

So based on an OS of 5 billion shares, INSQ prospects having risen from being involved in the fast growing ethanol industry that is gaining national attention, its stock has every chance of hitting 2.4-2.6 cents based on projected revenues and earnings coming on board from 2006 and beyond.

Now I do recall (if I remember correctly) Kevin Kreisler mentioning repeatedly in the past that one of his priorities was to reduce the OS by converting around 3.1+ billion of the GSHF restricted common shares in INSQ into preferred shares, thus reducing the OS at a stroke to around 1.8 billion. I think Rivet earlier made some mention of this as well. Now if that is the case, the EPS would go up significantly.

We are then looking at projected EPS of 0.0022. At a P/E of 30, that would translate into a possible share price of 6.6 cents. For the discounted intrinsic value analysis, that would translate into a possible share price of 0.0022/(0.08-0.05) = 7.3 cents.

So I expect an even further bigger bang IF (it is only an IF, but certainly something I believe that Kevin has mentioned was a priority in the past) INSQ releases news that it has restructured its OS to 1.8 billion from 5 billion.
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