Pursuit dynamics - half full or half empty?

One of the things that intrigues me about Pursuit Dynamics (LON:PDX) is that views on it are so polarised. Look at any of the bulletin boards - or at press comment on the company - and you'll find half the world seems to hate it, while the other half thinks it's the Second Coming. There doesn't seem to be much in the middle. The other thing that intrigues me is that the share price has rocketed over the last couple of weeks, particularly since the February 25th announcement. [ref] http://www.stockopedia.com/news/announcement/PDX/100225pdx001335.htm?title=Pursuit%20Dynamics%20PLC%20Pursuit%20Dynamics%20Brewing%20Announcement&date=1267056000 [/ref] Definitely time to take a look at this one!

The technology platform certainly looks interesting. The company has a large number of patents, all based on injecting a very high speed gas into fluid to create steam, or a mist of very small droplets. There are two main streams of tech - the first is atomisation, which can create mists for decontamination or fire-fighting purposes, and the second is what's called the reactor technology, which has uses in the food and brewing industry. There are major energy savings from using the technology - for instance Shepherd Neame claims a 47% plus saving in certain parts of its brewing process.  Now I know my brewing industry and have brewers as friends, and energy cost is one of the things that gets them very excited - if they can save some gas by fitting a new heat exchanger, or using some new tech, they will. So this is definitely a technology with its uses, and if it works at Shepherd Neame, there's no reason it shouldn't work elsewhere.

What does worry me though is that although Shepherd Neame has ordered a second system, there's not a single documented deal with another brewer.  One contract never makes a technology - but getting the second and third deal can be difficult. It also worries me that PDX seems to have a track record of over-promising and under-delivering. It appears to have been slow to move from having some exciting patents, to actually managing to make some revenue out of them. So that leaves some significant execution risk. The company is still burning cash - over the last four years, it's worked its way through quite a lot, and though it claims to have halved the burn rate [ref] Investors Chronicle, 7 December 2009: http://www.investorschronicle.co.uk/Companies/ByEvent/Results/Analysis/article/20091207/5ccf65e0-e32e-11de-a4de-00144f2af8e8/Pursuit-still-chasing-new-business.jsp [/ref] and aims for positive cash flow by end of 2010, going from zero to £5m plus revenues is quite an ask.

Pursuit has also been criticised for changing its priorities [ref] Independent, 22 October 2007: http://www.independent.co.uk/news/business/comment/small-talk-can-pursuit-dynamics-turn-potential-into-profit-397568.html [/ref] . None of the 'new' areas for the application of the technology have yet created any significant flow of orders, and biofuels - touted as the next big thing early last year - is now being 'reassessed'. (Though that might be a smart decision by the relatively new CEO.) 2009 results are not inspiring, with “virtually nil” revenue [ref] Annual report, p 2: http://www.pursuitdynamics.com/downloads/PDX-Annual-Report-2009.pdf [/ref] and £4.8m a year cash burn (that's after the reduction I already referred to). With just £5.7m cash in balance sheet the group is clearly going to sail close to the wind by the end of 2010 unless customers stump up some considerable cash.

In the light of this it's difficult to see how broker Mirabaud could justify a 500p price target, against 190p today - giving a market capitalisation of £300m plus. Even if the company gets say £3m revenue, 100 times revenue is the stuff of dot-com dreams. Mirabaud has focused on the market potential. It reckons the market for brewing systems could be worth EUR 2.1bn, and if PD gets a third of the market, that would be EUR 700m revenues at pretty good margins. But how realistic is that? From having installed a couple of systems, it would need to be installing hundreds, at full industrial scale.  I just don't see how the company could deliver on that scale without incurring significant up-front costs of employment - and I suspect the company is being valued on potentially huge revenues, without much thought about what the costs might be.

So while I'm not an 'unbeliever' in the technology, I don't think this is necessarily a company I'm going to get interested in right now. I think there will have to be further fundraising - most likely on the back of any firm deal announcements - and that could provide a reasonable in-price together with more definition on future prospects. This is a very volatile stock, as the last couple of weeks have shown - apparently there are rumours about a deal with Heineken - so perhaps it's one for the speculators, but I will be watching with interest from the sidelines for the time being.