Good morning!
CEO Interview - Best Of The Best (LON:BOTB)
(at the time of writing, I hold a long position in this share)
It's been nearly 3 years since I last interviewed William Hindmarch, CEO of BOTB - a small AIM-listed company which operates weekly supercar & luxury goods competitions. The company has transitioned from operating in airports, to online. There is only 1 airport location left, Birmingham. This has partially obscured the growth from online.
My feeling is that the company has the potential to become more highly valued, if the growth rate can be stepped up. It has been paying generous divis in the last few years, including specials.
As usual, I like to crowd-source the questions for my interviews, from you. Therefore, if you have a question that you would like me to ask William, please leave a comment on today's report here, below.
Wey Education (LON:WEY)
Share price: 15.0p (before market open today)
No. shares: 130.7m
Market cap: £19.6m
(I no longer hold any position in this share)
This is an educational business, operating online home schooling services.
Setting up the proposed JV in China is taking longer than expected.
The delay is not expected to have any material effect on revenues or profits for the current year given the internal budgets for the anticipated build-up of the operations this year.
The current year ends on 31 Aug 2019.
Current trading - the main business seem to be going well;
The Company is pleased to report that at this early stage of the new financial year all business divisions are reporting an encouraging start. The Company has previously stated that in addition to its international operations, its priority for the current year is to drive growth in its traditional online school and B2B division.
It is pleased to note at this stage of the year, those divisions are reporting sales activity materially ahead of the equivalent position at this time last year.
Broker update - the house broker has put out a short note today, saying that it will not be making any changes to existing forecasts.
My opinion - the 2019 forecast looks very aggressive - with revenues more than doubling, and profit rising substantially. In my experience, that type of forecast, based on very ambitious growth, is usually not achieved. So valuing the company on a multiple of an aggressive forecast, is probably not a good idea.
I made a mistake with this share, buying into the growth story last year, at too high a price. I still like the company, and the sector it operates in. However, when I realised that it was over-valued, I decided to take the losses on the chin, and watch from the sidelines for the time being.
Another educational business, called Malvern International (LON:MLVN) caught my eye, so I'm currently holding that one, instead of WEY. The latest figures from Malvern were not good, but the attraction of that share is the excellent track record of the new management team.
WEY remains on my watchlist, with a view to possibly re-buying the share, at some point - if risk:reward feels right.
The chart seems to be looking like it might be finding a floor, possibly?
Big Sofa Technologies (LON:BST)
Share price: 3.75p (down 47% today)
No. shares: 82.6m + 52.6m new shares in placing today = 135.2m
Market cap: £3.1m pre-placing, £5.1m post-placing
This is a jam tomorrow, heavily cash-burning micro cap. Its activity seems to be something to do with video analytics.
We've only covered it once,at SCVR here on 31 Jan 2018, when I concluded that the share was extremely high risk, and best avoided. It was 13.97p per share then. So we've now seen a 73% fall in share price since then (a lot of which happened this morning, on the deeply discounted placing).
Half year results - I won't waste any time on these figures. Suffice it to say that they're rubbish.
The problem is that revenues are very low (at £620k in H1, up 20% on prior year's H1). Combined with this is an overheads base that's completely out of kilter with the low level of revenues.
This has resulted in a £1.7m loss in H1 - down from £2.1m loss in H1 last year.
The narrative makes plentiful reference to big name clients, and huge potential market size (usually a very bad sign), but that means nothing when you're supplying a service at a heavy loss overall! It's only logical for customers to want to take advantage of a supplier that is offering to provide a service at a price which results in heavy losses for the supplier.
The company needs to raise more cash, and a second announcement today covers that.
Fundraising - £1.68m has been raised at just 3p per share, a discount of about 58% to Friday's closing price. This is a great example of how private investors are usually shafted when jam tomorrow, cash burning companies run out of cash. There is no facility for private investors to participate in this fundraising on the same terms. The only option for masochistic investors who are determined to throw money down the drain, is to buy shares in the open market, currently at 4.0p.
What is even more galling in situations like this, is that the insiders supporting the placing could even sell some of their new 3p shares at a profit this morning. Usually the share price gravitates down towards the placing price.
It's interesting to note that the nominal value of shares is also 3.0p. So if the nominal value had been lower, then the company might even have been forced into doing the placing at an even lower price. It takes time to go through the courts to reduce the nominal value.
This comment in today's RNS concerns me;
The Company's growth has led to it absorbing cash which will continue for a number of months; the Subscription is necessary to sustain the business and support the growth strategy.
The Board has agreed to a number of significant cost-cutting measures to bring the Company to cash breakeven sooner without affecting its ability to deliver anticipated revenues.
This begs the question as to why the company has continued spending money on apparently useless overheads, up to this point? The wording above also sounds as if pressure from investors is the reason for the cost-cutting. All of which smacks of incompetent management.
My opinion - readers may wonder why I'm writing about this company, given how bad the figures are, and the deeply discounted fundraising being done in order to keep it going? The answer is that the most valuable lessons are by looking into shares which have gone badly wrong.
This share is a classic case of a jam tomorrow story, being heavily promoted to gullible investors, and then running out of cash. There are so many of this type of share on AIM, and in my experience, hardly any jam tomorrow companies actually deliver on their forecasts. I've learned that from personal experience, from having thrown plenty of money down the drain on jam tomorrow shares! Even the few cases that do succeed commercially, usually take years longer & several more fundraisings (usually at lower & lower prices), to succeed.
So why on earth do investors keep queuing up to buy jam tomorrow shares, when they usually fail? Stopping investing in jam tomorrow companies (unless it's something that I understand inside-out, like Sosandar (LON:SOS) - my largest current holding) has stopped the biggest leak from my portfolio.
Looking for upside here, to balance things up a bit, all I can come up with is that Directors & former Directors are putting in some of their own money into the placing. Also, so is IPSOS, a strategic investor, whose backing seemed to validate the story here. With a lower cost base, maybe the company could succeed financially?
The most important part of the outlook statement doesn't sound encouraging at all to me;
... Our focus on large multinational organisations during this period of change in the research industry means that we continue to experience slow sales cycles and lumpy revenues...
I can't see any reason at all to invest here. This is an emergency fundraising, from existing investors. It's quite obvious that this business has been a dismal failure to date. So why on earth would anyone want to buy shares in it now? There must be an increasing risk of a de-listing being the final outcome. After all, if the story has gone stale, and there's little to no prospect of raising more cash from external shareholders, then why bother with the cost & hassle of a listing?
It's interesting to note that rumours of a strong improvement in trading, from large scale, lucrative contract wins was leaked some time ago. I commented at the time that this is absolutely wrong - both the leaking of information, and publishing it. It's also usually negative for the share price - because it often means that attempts are being made to ramp the share price up, ahead of another placing, and/or to generate demand in the market, so that insiders can sell shares.
I have no truck with market rumours. If a company is trading well, then it is obliged to issue an update to the whole market, via an RNS. Information should never be leaked. The contract win RNSs notably avoided giving financial information about the contract wins - which means that they're probably not material.
I'll change my mind on the share, if the facts change. Specifically what I'd be looking for, is an acceleration in sales growth - the company needs to grow sales by multiples of the current level. Also, deep cuts in overheads are needed. The historic cash burn is clearly unsustainable.
Therefore, it's possible that at some point in the future, the share price could partially recover. I think it's more likely that the company would continue to struggle. There's no sign of a viable business model here yet, so why get involved in it?
Renew Holdings (LON:RNWH)
Share price: 402p (up 2.6% today, at 10:22)
No. shares: 75.3m
Market cap: £302.7m
Renew (AIM: RNWH), the Engineering Services Group supporting UK infrastructure, announces a trading update ahead of its annual results for the financial year ended 30 September 2018 which will be announced on Tuesday 27 November 2018.
Today's update sounds encouraging;
The Board expects the Group to report results for the year to 30 September 2018 in line with market expectations, delivering good growth in operating profit and further improvement in operating margin.
A key focus of this group has been to steadily improve its profit margin, and it has been successful in that regard.
Order book - sounds healthy;
We expect to report further growth in our Engineering Services order book, underpinned by our extensive portfolio of long-term frameworks contracts.
Acquisition - of QTS in May 2018 has "gone extremely well", but performance is only in line with expectations, which strikes me as somewhat contradictory - surely it should be ahead of expectations, if things have gone extremely well?
Net debt - also in line;
The Group's net debt as at 30 September 2018 is expected to be in line with market expectations.
My opinion - this company has established a very good track record in the last few years - of growing revenues (much from acquisitions), increasing profit, paying progressively increasing divis, and managing to juggle a weak balance sheet with apparently no adverse consequences.
On checking the most recent interim balance sheet, I note that it is still weak - with negative NTAV, and an adverse working capital position - its current ratio is very low, at only 0.68. This does not seem to be causing any problems for now - maybe this is the type of company that can permanently operate through being paid up-front by customers? It's the trade payables figure that jumps out at me as being far too high.
Therefore the balance sheet risk remains a potential problem, if something else were to go wrong.
Sector risk is also high - we've seen before numerous examples of low margin contracting businesses running into problems (and sometimes insolvency). Therefore I think this sector needs to be treated with great caution. Indeed, I avoid it altogether, as too risky.
I'll call it a day for now, as I have to travel.
Best wishes, Paul.
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