LON:FLX | FLX - Bombed Out Stock, Significant Upside?

11th Oct '16 by Philip999

9 comments 4774 reads

FLX had a wonderful start to life back in 2013 rising from an IPO price of 12p up to 60p primarily on hopes of a potential large contract in the Middle East, this distracted from its core business of Intelligence & a fledgling Cyber Security premise.

Potential large contract in the ME didn't materialise and Falanx didn't execute its game plan, shares subsequently nose dived to circa 4p an have bumped around this mark for the last 6 months.

Investor appetite is still rather muted but forthcoming interims should show a much improved situation and may be a catalyst for a rerating. I don't intend to go it great detail but on the face of it FLX may surprise the market if quoted cash burn rate is realised.

Falanx Intelligence, as a minimum should match last year’s revs at £1,580,000. Whilst Falanx Cyber Defence is on course (conservatively based on 80k revs p/month) to hit £960,000 so full year rev targets of £2,540,000 with cash burn of £800,000 would produce an OP of £1,740,000. Cash burn is as per quoted figures from July’s 16 results dropping from 100k in May down to 50k in Nov 16.

The above isn't meant as my anticipated forecast but merely to generate some discussion.

I'm intrigued if this is on anyones radar, any thoughts?

OD

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Philip999

12th Oct '16

Not a huge fan of Justin Waite but a useful interview John Blamire last week, worth a listen.

https://www.voxmarkets.co.uk/blogs/602-falanx-group-and-defenx-group/

Confirmation that trading is going well and acquisition seems to be coming on very nicely, bodes well for interims next month.

OD

Jpgt1

OD
I've been watching this for a while. You are right that it is the Cyber Defence division which has been two years in the making that is generated the interest.
FLX are a 'forward looking' company (some may describe it as 'jam tomorrow') who have invested significant money raised through placings to develop their business capabilities in Cyber Defence. They rightly in my mind havn’t focused on some fancy tech IP, but have developed a service model that has the potential to resonate with public and private SMEs looking for advice and expert delivery to mitigate risk at the lowest cost.
The challenge for the company is to grow the client list from a handful, to 10’s and then hundreds, each bringing in modest but recurring revenue, alongside larger one off payment for consultancy and design. The recent market interest arises because they may just be doing exactly that, though my immediate expectations are that they still have some time to go to deliver a profit. This has been achieved through the efforts of the CEO to firstly assemble a team with the tech knowledge to build their service and gain the necessary certifications, and secondly to attract respected management to join the team (including the Chairman, and new Director of Cyber Defence who came with the purchase of his small company by £FLX).
I concur with your revenue interpretation, and for once FLX may surprise in this regard given the language they have used recently. I don’t understand your use of Cash Burn and calculation of Operating Profit. My understanding was that Cash Burn is effectively the amount of money they need per month to keep the lights on. FLX have significant cash in the bank to do this (which should be reflected in the Stockopedia report after the interims next month). Thus isn’t the OP negative at this point? I expect to be corrected as my understanding of financials is at an early stage.
Regards
John

Hi John,

Some great observations.

Regarding number crunching, conservative guidance suggests revs of £2.54m this year based on Falanx Intelligence achieving like for like sales of £1.58m & Falanx Cyber hitting £960k. Cyber figures are a simplistic multiplication of 80k p/month run rate quoted from Julys results... both divisions are growing esp cyber.

I've used cash burn figure as inclusive of all outgoings quoted at 100k in May this year falling to 50k in Nov, this isn't something i'd put a great deal of emphasis on at this stage but really a best guess given the info in the public domain. The above being correct i'd expect an OP flow of something like:

May - OP £111,666.66 (Revs £211,666.66 - Cashburn £100,000)
June - OP £121,666.66 (Revs £211,666.66 - Cashburn £90,000)
July - OP £131,666.66 (Revs £211,666.66 - Cashburn £80,000)
...
etc etc until FLX hit Nov 50k cashburn rate at which point OP will will increase in line with revs only and not as a result of cost savings as cashburn will have plateaued and might even start to rise with increased sales if FLX are lucky.

Based on the above assumptions FLX should be cashflow positive all year (not sure about March & April) and making a reasonable profit. To be clear the above is based on an awful lot of assumptions and frankly i'd be shocked if FLX got anywhere close to those targets based on a pretty disastrous first few years trading.

I think you've hit the nail on the head when you've touched upon the merits of the company's cyber division and its revised strategy to offer a service model reliant on increasing the client base. From updates this strategy appears to gathering momentum and i like the push not to focus solely onto government contracts. The tie up with insurance companies seems like an exciting proposition especially as this could actually reduce premiums for companies moving forward who are able to prove they take cyber security seriously.

The Turner Pope investment seems a shrewd one and if one was to follow the money alongside the growing expectations/all time low SP the risk/reward for access to one of the fastest growing UK sectors looks rather good.

OD

The more i think about it, the more the 50k cash burn seems incredibly tight. With listing fees, staffing costs etc. Worth further investigation.

OD

skyjacker

OD I think you are misunderstanding what cash burn is. When company says that their cash urn will be £800k depending if they mean net burn or gross burn this in simplistic terms will mean that they will spend £800k more than revenue. I realise there are various accounting adjustment some I.e. Capitalisation of assets etc but in reality I expect company to incur at least £800k loss possibly loss will be even higher.

Looking at cash they had £430k at the end of March and £1.2m at the end of June. As they raised £1.55m between March and June they burned through £0.7m in just 3 months. Maybe can allow for some levy in case quoted effigies are gross raised it would still mean that company went through at least £500k in first 3 months so £800k target for full year is very ambitions and I doubt they will achieve it. So at they end company has enough cash for another year a aye a bit more if cash burn decreases further.

For me personally it's not investable share as company struggles to make even gross profit. Perhaps this year will be different but until it is reasonably profitable at gross level it is uninvestable for me.

Admission Doc state directors salary from earlier years as:

5.3 Employees and Directors

Directors’ remuneration
£195,540 (2012)
£282,637 (2011)
£390,588 (2010)

So with purse strings being tightened and say 100k listing fees perhaps 50k (600k p/year) run rate is achievable.

OD

skyjacker - i think you've hit the nail on the head, i've taken figures as gross as opposed to net. Will look further in the morn.

OD

13th Oct '16

Skyjacker

Thanks for the clarification on how to interpret Cash Burn.

I note £435k of the 1.55M raised in May was used to buy ASC, which seems to have been a catylist and immediately value enhancing to the group as a whole (FLX had clearly been working with ASC before buying the company, hence they new what the value was to them). Thus as long as FLX keep growing towards profitability, the money in the bank should go further than the one year plus that you estimated.

thomasbertram001

30th Oct '17

This has been flagged at a well known "Tip Sheet" however the more I read the more it becomes obvious that this is speculation not investing. Place your money and hope for the best. No longer my cup of tea. Been burnt too many times by financial sheets dressing up speculation as investing. Always interested in what Paul Scott's take on balance sheets are.

FLX - Bombed out stock, significant upside?

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Philip999

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