Range, Sefton, Qihang etc – Revenue and FREE cashflow

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You know my views on all three stocks. More on Range (LSE:RRL) later but it is still a sell with a 1.5p target after today’s news. Sefton (LSE:SER) at 1.16p remains a sell down to 0.1p. At 13p  Qihang Equipment (LSE:QIH) is also a sell with a target price of 0.1p. But I note BB comments about these penny share dreadfuls which just nag on about production levels and compare that to the market cap and insist that I have got it all wrong. Well here is why the BB morons need to rethink – and incidentally this applies to all companies.

To read the most recent bear case on all three go to




Production levels dictate revenue. But that is only 1/4 of the story

Firstly there are costs. So to use Sefton as an example. Let us say (to make my maths easy) that it produces 107 bopd. It sells at $100 so that is revenue per day of $10,700. That sounds great. But….

a) you have costs.  How I wish I had no costs at Real Man Pizza Company. If my waiters worked for free and the food suppliers handed over goods for free I would be onto a real winner. But damn them they insist on being paid.  And that is the way with all businesses. And so Sefton admits that it costs per barrel at current output levels give it a margin of $29.50 a barrel ( presentation 9th October 2012). So in fact  cash in is not $10,700 pcm but $3,156.

b) All firms do not get to sell their goods and turn those goods into cash at once. A well run firm should get paid its cash within 45 days and depending on its cost base mix it will pay out in about the same. If costs are all staff it pays out in 30 days. If low staff and a lot of suppliers it may stretch that. If like Qihang customers take months and months to pay you wonder if some of them ever will. If there is any doubt about that then revenues and profits (or losses for Qihang) are arguably stated in an aggressive manner. If a customer does not pay his bills a profit is illusory. Cash is what counts.

c) This is the killer for Sefton ( and I think Range as well) there is capital expenditure (capex). For Warren Buffett a good company is a machine which once built just takes in cash (revenue) and spits out a high percentage of that as profits to the owner. It needs nothing spent on it to maintain it.  A bad company is the reverse.

And so if one looks at Sefton it requires vast capex simply to maintain output levels at its tired old Tapia field. Year in year out capex exceeds profit. Stop the capex and output slumps. If one charged capex against the P&L as it was incurred no profit would ever be shown. This is not capex to expand just to maintain output.

And so for Sefton that $3156 number is profit but it is not free cashflow. Ultimately a company is worth not the net present value of profits (which can be “enhanced” by booking revenues with customers who take an eternity to pay) but of free cashflows. For Sefton we have already established that free cashflows from operations are effectively negative. Range must explain how much capex is needed in Trinidad to get output up to the levels it forecasts. More on that later. For Qihang I ask you to compare depreciation on its heavy usage equipment and its purported book value and to work out what capex you think it needs.

I hope this is helpful…

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  1. Tomasso says:

    Basically Sefton is a timebomb waiting to happen, I am an accountant and this is probably an example of the worst way to run a business. I have ssen businessed badly managed but for Sefton’s board and with their combined experiences I’m flabbergasted how incompetent they really are , probably the worst i have ever seen on AIM. Anywayz, Tom, I’m glad you realized that and got the message out, once people have sussed out Sefton, the capex will stop and this one will be called into administration. 100% sure.

  2. OhDear says:

    The information on the capex for Range is out there you’re just too stupid too have done any research. As usual your ill informed articles continue.

  3. SeanBenn says:

    The bright flashing lights of Aim and BB’s seems to attract retailers like magpies to shiny objects, The reality is the magpie is a expert in the seeking of great shiny objects whilst the retail investor is rarely an expert in anything other than mimicking the tripe distributed by some tin pot operations.
    To sling mud at a opinion is nothing more than the school yard behavioural patterns of some of these public outlets or blogs.
    I fear obtuse opinion or thoughts are not welcomed in the funny farm investment circles some have furnished in the cyber world. I personally enjoy reading into the facts, The propaganda and the reality of Aim and the stock market curve balls being pitched. ‘ I suggest that market mechanics need further attention from the post made earlier ‘

    Many thanks Sean

  4. Floyd Watler says:

    Very good suggestions you came up with inside your post, for certain some thing I desire to take into consideration much more and see regardless of whether I feel it can be turned into reality or not.

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