Small Cap Value Report (17 Dec 2015) - ZYT, CHA, BOOM

Good morning!

I'm interviewing the CEO of Zytronic (LON:ZYT) this afternoon, am looking forward to that. I've only had one reader question submitted so far, so could do with a couple more. Therefore if you wish me to ask the CEO of Zytronic anything specific, please submit your question using this simple form, and if it comes in before 2:30pm today, I should be able to ask it (the interview starts at 3pm)

Concha (LON:CHA)

Share price: 0.75p (down 71% today)
No. shares: 1,552.7m
Market cap: £11.6m

Termination of investment discussions - let me translate this as: the big ramp finally unravels. Concha is just a cash shell, which only had £5.7m in it when I last looked at it here on 31 Mar 2015. I warned readers that the £92.5m market cap (once options were included, or £78.8m without, at 5.33p per share) was completely ludicrous. When I find over-priced junk, I don't hold back, because people need to be warned, and my concluding comments on 31 Mar 2015 were:

"It will be fascinating to see how this pans out. Anyone buying the shares is crazy, as it's nothing more than a wild & grotesquely over-priced speculation at the moment. Let's see if anything of substance does appear, to justify this absurd valuation. It's going on my bargepole list for now though. - See more at: http://www.stockopedia.com/content/small-cap-value..."

The company had said it had found an exciting but unspecified investment opportunity, but that has now fizzled out. So the valuation now resets back to what it should be for a cash shell, which is at par with cash. So the shares really need to fall further, to about half the current price to get there.

It was blindingly obvious that this share would collapse sooner or later - you can't defy gravity forever, by valuing a cash shell at £70-85m more than its cash pile, justified simply by vague assurances that an exciting investment is going to be made with the £5.7m cash.

It's just a pity that I wasn't able to get a short on, but never mind. Frankly, it's just embarrassing that silly ramps of this nature keep happening on AIM. Part of the problem in my view, is that AIM has no minimum free float. Therefore it is very easy for unscrupulous groups of people to operate a "corner", then manipulate the share price up to anything they want. Squeezing out shorts can further exaggerate upwards movements, hence why it's so dangerous to short illiquid AIM stocks.

My opinion - elaborate ramps like this share always end in tears. It's only a matter of time, as they can continue for quite some time, and you often see the same names behind this type of ramped up cash shell. Early birds can get lucky, and catch a worm, but generally by the time you see a bandwagon, it's already too late, and your buying will just be lining the pockets of the stock promoters, and giving them a profitable exit, whilst you end up with a 90%+ loss, once reality pulls the price back down to earth.

Anyway, readers here were warned in no uncertain terms that this was a blatant ramp, and it's another win notched up for my Bargepole List - which incidentally is only scratching the surface of all the rubbish companies on AIM, there are many more that I haven't ever got round to putting on the list, but which should be.

It just requires common sense more than anything, to see that a cash shell with £5.7m in it cannot possibly be worth £75-95m. It clearly doesn't make sense. If it looks too good to be true, that's because it isn't true!

In the end, this type of thing always collapses back down to where it started, timing is the only question:

Audioboom (LON:BOOM)

Share price: 3.6p (up 9.2% today)
No. shares: 535.6m
Market cap: £19.3m

Clarification of CEO comments - let me translate again: the CEO has had his legs slapped, for being naughty, ramping the share price in a promotional video interview.

The RNS today says;

In a recent interview, which has since been broadcast as a podcast, Audioboom's Chief Executive Officer, Rob Proctor, made reference to a new content deal and adviser related matters which would be announced next Monday.

 No further details about the deal or content partner were disclosed.  Although the Board would not expect any such announcement to be of itself price-sensitive, the Company wishes to update the market that the comment was made. 

I'm confused here. The CEO pre-announced something in an interview, in order presumably to excite investor interest and push up the share price (why else mention it?). Yet the company says the announcement won't actually be price-sensitive anyway!

I think the reality is that the company is nearly out of cash, and so they want the share price up ahead of the next discounted Placing. A recent announcement indicated that the cash pile was down to £3.1m by 30 Nov 2015, and this is a heavily cash-burning company, with to date negligible revenues.

The company had £6.2m in cash at 31 May 2015, so in just 6 months it has burned through half that cash pile. Therefore, even if some revenues are generated in H2 (H1 saw revenues of only £46k - no you read that right, £46k), then the company looks set to run out of cash in perhaps Jun 2016?

So I imagine a Placing is already being worked on, hence why private investors are being warmed up for exciting things ahead, to induce us to act as cannon fodder to get the share price up, before a discounted Placing is done with larger investors.

If they can get the share price up to say 6p, then a Placing at 4p would be do-able. Placees will then flip the stock, and the share price will come back down to 4p, then probably below. It's the same old cycle that you see happening over & over again with blue sky AIM stocks. Indeed, it's exactly what happened when BOOM raised £8m in Oct 2014 - a big push was made to get the shares up, then the Placing happened at a discount of about 10-20% from memory, although the share price was very volatile at the time.

My opinion - bottom line is this. BOOM has failed so far to demonstrate that it has a viable business model. It's created a super App, and offers a very nice service, of spoken word audio clips. However without revenues, that's not a business, it's a public service.

I think investors are beginning to realise that Apps are a money pit. The odd one might make a fortune, but most seem to be a dead loss commercially.

I would look again at BOOM if & when it gets close to breakeven, but it's nowhere near that point yet, so is reliant on another funding round to keep the lights on throughout 2016.

The story a couple of years ago was that you could value sites like AudioBoom based on a multiple of their users. So £x in value per user. I (briefly) was seduced by that logic, until I had lunch with a bear on the stock, Was Shakoor (@Wshak1 on Twitter) who has a great nose for BS, and he persuaded me to ditch my shares for a profit, when the price was in the teens. Thank goodness!

I wish the company well, as it's developed a good & useful product, but it really does need to demonstrate commercial viability before I would look again at the shares. Hope, and hype are not enough any more.

Note how a huge rise in share price, in a speculative stock, is so often followed by a long drift back down again to where it started. There's a lesson in that.