Small Cap Value Report (9 Sep 2014) - SNTY, BLUR

Good morning!

Synety (LON:SNTY)

Share price: 185p
No. shares: 8.4m
Market Cap: £15.5m

Shares in this micro cap cloud telephony company have taken a battering this morning, down 35p or nearly 15%, on publication of interim results to 30 Jun 2014. I don't tend to take much notice of share price movements in illiquid micro caps like this, because the price can go all over the place (both up or down) on a relatively small number of trades. It's important to keep focussed on the longer term fundamentals, not the sentiment of the handful of people who happen to be moving the price on any particular day.

I think you also get a lot of traffic in & out of this type of small growth company from punters who don't do any research, but instead buy on magazine tips, and then panic sell a few weeks later, especially if they don't know what the next set of figures are going to look like. It all adds to volatility, and is just an occupational hazard at this end of the market. It also creates opportunities though.

Profitability - the company is loss-making, as expected, generating a pre-exceptional operating loss of £2.2m on turnover of £608k in the first six months of 2014. That might sound terrible, but it's a growth company, which raised money recently to step up its sales overheads, and expand in the USA.

Also bear in mind that as turnover is growing rapidly in % terms, so reported figures lag behind the current position. So annualised recurring revenue (the key performance measure at this stage) was £871k at end Dec 2013, rising to £1.72m at end Jun 2014, and has risen further to £2.0m by 31 Aug 2014. That's encouraging, but the company still has a long way to go to reach breakeven. However, more than doubling recurring revenue in six months is pretty good going in my view.

Balance Sheet - the company raised £5m in a Placing & Open Offer earlier this year, so it's OK for cash at the moment - there was £4.9m on the Balance Sheet as at 30 Jun 2014. The average monthly cash burn was £346k in H1, so I think we have to work on the assumption that the cash pile is going to be spent over the next year or two, which is what the company planned, so no surprises there.

Commentary - is mainly positive, but there is one minor glitch, where the company says;

...non-recurring sales of hardware and other one-off fees were softer and some of the growth in recurring revenue was later coming through than expected due to longer on-boarding periods of bigger customers, which will have a short term effect on actual revenues for this year.

Personally I'm not bothered by this, as there will always be bumps in the road for small growth companies. Far more importantly, the company says;

The second half of the year has started very well and ARR at the year-end is expected to be on target. The board's growth expectations for next year remain unchanged.

(ARR = annualised recurring revenues)

So nothing's changed really, and I can't see any reason for this morning's share price fall, indeed I bought some more at 180p this morning, which was nicely timed (more luck than judgement!)

I also like this comment about the crucial US market;

Results to date from the US are very encouraging.  All US indicators are showing that there is considerable appetite for CloudCall and the sales process and conversion matrix, including decision making cycles, which are remarkably similar to the UK, but the market is significantly bigger.  To date we have signed up 23 US customers, with several others participating in trials. This is considerably ahead of forecast, and the sales pipeline for later this year looks particularly promising.

Outlook - this is somewhat mixed, but the key sentence for me is this one;

The strong trading already seen in the second half of this year, together with the US success to date leads the Board to believe that orders received and ARR will be in line with, or ahead of, city expectations at the year end.

My opinion - bear in mind that the Executive Chairman at SNTY is a fairly excitable chap, so he's always positive about everything! Therefore a degree of caution is necessary for investors, not to get too carried away. Having said that, I reckon it's a very credible growth company, building a high quality, recurring revenue stream (remember that the business model is not one-off licences, but modest monthly fees from a sticky client base that is building rapidly, albeit from a low starting point).

This share is not for widows & orphans, it's a loss-making micro cap, hence highly speculative. That said, it's got a great product (I signed up for it myself, and it's absolutely brilliant - a complete no brainer for SMEs to use, hence why I like these shares), and the £15.5m market cap seems to factor in very little upside for a company that has more than doubled its turnover run rate in the last six months.

The wobble in share price this morning was a buying opportunity in my view, so I bought some more.

The shares are high risk, but potentially high reward, as the market rewards rapid growth with a high rating at some stage, and there's also the possibility of Synety being a bid target at some point. So a bit of a wobble this morning, but I remain bullish on this stock - but peppered with copious risk warnings in this case, as it's not my usual style of value investment at all - it's very much at the opposite end of the risk spectrum!

There's a Webinar for investors starting shortly (10:30 today, 9 Sep), the webinar sign up link is here. I'm a huge fan of webinars, and wish more companies would do them - it allows private investors to far better understand companies, and a good webinar is almost as useful as a face to face meeting I find. So companies themselves, PR advisers & brokers - do lots more webinars please!!

These shares have been a real rollercoaster so far - welcome to AIM!

EDIT: I've just viewed/listened to the Synety results webinar, and have to say it was superb - lots of additional colour, and explanations of the results, clearing up misunderstandings, etc. The key points for me are that the company is on track with their plan, and expected to reach breakeven by late 2015/early 2016. There is adequate cash to get there.

I think this is a high quality little company that is really going places. The new products which can drive sales calls to potential customers from texts or web pages, sounds a very exciting additional route for next year. You get the impression the management team are very bright people, entrepreneurial & innovative, just the sort of people I want to back. Also very open & the communication with investors through an open day at their premises and the webinar today was superb.

As you can probably tell from the tone of this report, I'm not impartial on this company at all, I think it's a terrific company, going places. So even more vital than usual for readers to do your own research, and throw a bucket of cold water over me probably!

Blur (LON:BLUR)

Share price: 88.5p
No. shares: 47.1m
Market Cap: £41.7m

Interim results to 30 Jun 2014 are out today. Whilst turnover is up, the company remains heavily loss-making. They are a long way from proving up their business model in my opinion. The jump in revenues in H1 this year compared with last year looks very impressive at 303% to $5.7m, however the H2 LY to H1 TY sequential comparison looks a lot less impressive, at +69%.

Also bear in mind that revenues are not really revenues, as they include the value of the client's services. So gross profit is a better measure of turnover, and that was only $1.5m in H1. A thumping loss before tax of $4.8m was recorded in H1.

So expect the company to continue burning through the latest round of cash raised at 75p per share in May/June of 2014.

Blur seems to operate a website where companies can put marketing jobs & similar out to tender.

In fairness, I've not looked into the business model in enough detail to be certain of my opinion. However it looks too high risk in my view, and very questionable as to whether they have a viable business model at all. People who bought into the earlier hype have nursed massive losses, as you can see from the chart. It rarely pays to cough up a fancy valuation for this type of stock, so I will keep it on my bargepole list.

You do sometimes wonder, when this type of story stock is refinanced, whether the fund managers who refinance it are more concerned about their own career risk, rather than any genuine belief in the merits of the stock being bought? I'd only be impressed if they put some of their own money into it.

Apologies for today's report conking out at lunchtime, I was exhausted after spending all morning on Synety, and fell asleep.

See you in the morning!

Regards, Paul.

(of the companies mentioned today, Paul has a long position in SNTY, and no short positions)