Small Cap Value Report (6 May 2014) - PPS, MTC, PEN, BLNX, PPR

6th May '14 by Paul Scott

4 comments 15920 reads

Good morning! I trust that readers had an enjoyable long weekend. Not a huge amount of news today, so that eases us gently back into work. So here goes:

Proton Power Systems (LON:PPS)

This is a fuel cell development company, based in Newcastle Upon Tyne. This is the first time (and probably the last) that I've looked at their results. What a mess! Calendar 2013 saw turnover of £1.1m, and an operating loss of £4.9m, worsened to a pre-tax loss of £9.3m mainly due to £829k finance costs, and £3.5m loss on derivatives.

The interest cost suggests that the company is indebted, which is never a good thing for loss-making companies. I would only consider a loss-making company if they have at least 18 months' cash burn in the bank already.

The Balance Sheet here is insolvent - i.e. it has negative net assets of £13m. Current assets of £1.0m are dwarfed by total liabilities of £16.9m, most of which (£12m) is desribed as "Borrowings". Following note 16 through to the detail on this, and it turns out that the major shareholder, Roundstone Properties, is lending the company money to keep it afloat, on terms that look onerous - 10% p.a. interest, plus the loans are convertible into shares at just 2p. Bear in mind that the current share price is 9.25p, and you can see that potentially heavy dilution is in the pipeline.

Roundstone seem to own about 93% of the company, which makes it having a Listing at all pretty ludicrous. The market cap of £59m at 9.5p per share also looks to be a fantasy valuation, and for that reason I wouldn't go near this one at anything above 2p per share. Even at that level it would be a total punt.

The big problem with fuel cell developers is that there are so many of these companies all over the world, many of which are much better funded than this one. So what are the odds of happening to pick the one that's going to be a success, instead of one of the many that are likely to fall by the wayside when funding dries up?

I was caught once before on fuel cells, with a thing called Voller Energy, about 10 years ago, where I lost a packet…

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Ramridge

6th May '14

Hi Paul -
Re. PPS. My understanding is that companies in the main market need a minimum float of 25% whilst AIM companies do not have a minimum stipulated under the rules. That seems ludicrous. How can you have a fair market when one shareholder can own more than 90% of a traded company? Apart from a question of liquidity, there are governance issues and moral hazards. Personally I stay away from a traded stock that has less than 25% free float, AIM or not.
Regards, Ram

Paul Scott

Hi Ram,

That sounds very sensible to me!
I don't have a hard & fast rule, but try to avoid all shares with a dominant major shareholder, or group of shareholders, as it's too easy to end up being stitched up.

However, I will bend that rule if the dominant shareholder(s) have a track record of not abusing their position. However, I won't normally buy into anything where a major shareholder has more than 50%.

A 29% shareholder that is independent can be a good strong counter-balance to management greed though. So I like it when someone like Hargreave Hale, or Miton, turns up with a big holding, as you know that they are probably going to be a positive steward over the company, to the benefit of all shareholders.

Regards, Paul.

Roger Lawson

Very good comments about speculators in Blinkx and other highly traded stocks such as Quindell. I was reading it and thought hey Paul has actually found a software company he likes - strong balance sheet, loads of cash, profits turn into cash, etc, but you did not quite manage to sustain the enthusiasm to the end. But I had better say no more before I get shouted down for being too opinionated.

AnonymousUser37607

9th May '14

Like you I also don't understand the business model and agree that on the face of it the results seemed reasonable - perhaps this is part of the issue now is that a lot of investors who were in Blinkx never really understood enough about how the business actually made money and this is contributing to the total lack of confidence. The share price has been hammered since the results and its difficult to see what will turn this around near-term (all the buying from Blackrock has not had an impact on sentiment). I have traded in and out a few times over the last few months (been out for a while now) but even trading the movements at the moment looks a risky proposition - for now I'll continue to watch

Small Cap Value Report (6 May 2014) - PPS, MTC, PEN, BLNX, PPR

Proton Power Systems (LON:PPS)

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Paul Scott

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