Small Cap Value Report (18 Mar 2015) - SNTY, BMY, ACSO

18th Mar '15 by Paul Scott

63 comments 34982 reads

Good morning! I was busy last night, adding comments on Fairpoint, Regenersis, KBC Adv Tech, and Ubisense to yesterday's report. So that full report is here.

Budget Day today, so no doubt there will be pre-election bribes for various interest groups, and a last ditch attempt to create a feel-good factor to make us want to vote Tory! Mind you, it will take more than George Osborne tweaking tax rates to repair the damage to my pension fund after today's news from Synety...

Synety (LON:SNTY)

Share price: 92.5p (down 33% today)
No. shares: 8.4m before, 12.3m after fundraising
Market Cap: £7.8m before, £11.4m after fundraising

(at the time of writing, I hold a long position in this share)

There are three announcements today from this niche telecoms/software company.

New Non-Exec Director - good news in that a highly relevant new NED has been proposed for appointment, Peter Simmonds of dotDigital (LON:DOTD) - a company which has been very successful in selling a niche software product on a SaaS model.

Final results - for the calendar year 2014. Clearly the market got wind of there being something up, as the results announcement has been delayed almost three weeks. Delay is never good news, hence why the share price has been falling of late. I'll come back to the results later.

Placing & Open Offer - it's been obvious for a while that the cash position was going to be tight in the run up to breakeven (forecast for early 2016), you could work that out yourself from the interim accounts. However, that didn't bother me because I thought it would be a quick & easy matter to raise a couple of extra million quid, if needed, given that the KPIs have been showing strong growth.

Unfortunately not. There has clearly been little appetite with investors for another fundraising, just a year after the last one raised £4.5m (before expenses) at 250p per share. As a result, the company has been forced to price this latest fundraising at just 90p - half the price the shares were trading at just a month ago.

3.1m new shares are being issued at 90p, raising £2.8m in a Placing. Existing shareholders will have the opportunity, if they wish, to take part in an Open Offer, on the basis of 9 new shares…

Unlock with Email

Unlock with Google

Already have an account?
Login here

iwright7

18th Mar '15

ED,

From your graphs strikes me that what we should be looking for is QMV Stockrank scores of over 90 with quality parameters in the order of:

ROA >10%
ROCE >18%
ROE >18%

Reminds me of a Can-Slim approach when above combined with recent momentum. Ian

Paul Scott

Hi Fangorn,

Tom W is always good value, and his bearcast today ranting on about Synety (LON:SNTY) is, as usual, a good listen! I would probably arrive at the same conclusions as him, if (as he says at the start), he knows nothing about the company or its products. If you just look at the historic numbers, then of course it looks awful - it was a start-up 2 years ago, so has had to spend the money first, and then revenue builds rapidly (which it is doing now). It hasn't missed forecasts by a lot, only marginally.

What Tom overlooks, is that because turnover is rising rapidly, the cash burn is not £400k+ per month. It's now down to £300k per month, and falling gradually, as monthly recurring revenues start to catch up with outgoings. So there should be enough cash now to complete the run at breakeven. He ignores proceeds from the Open Offer in his calcs, and I have a feeling the deferred consideration is payable in shares, not cash.

Although going back to my original comments above, I do agree that a tighter grip on costs is needed at Synety, so that some of the Placing proceeds are being used to add on more sales & marketing overhead, is a big concern. That said, you need to spend on S&M to drive the sales growth more aggressively. So it's chicken & egg really.

There was absolutely nothing new in Tom's bearcast today on Synety, nor did he reveal any insights whatsoever. But it was, as always, good fun! Those of us who are in this stock understand the business model (cash burn up-front whilst recurring revenues build), and are annoyed that they miscalculated the amount of cash needed, and have come back for more in a cack-handed way.

All this will have blown over in about a month's time, and if the KPIs are good over the summer, then those of us who averaged down at 90p will get our money back. I only need the stock to get back to about 145p to be back to 200p in old money, because I averaged down at 90p.

What caused the share price to tank from 200p to 90p in the last month? Nothing in the performance of the business (KPIs have been good). Just that they decided more cash was needed, and botched how it was raised. That to me is a buying opportunity, but I totally understand that most people won't see it that way - that's what makes a market!! When it gets back to 145p I shall be demanding free wine and pizzas at Tom's restaurant by way of an apology!! ;-)

Regards, Paul.

Fangorn

Cheers for the response PP.
Not a stock I follow, or would invest in tbh but I was interested in listening to his "OTT rant"
Just not a fan of his modus operandi but everyone has something interesting to say and unlike most I am always interested in hearing the other story.

It's just I occasionally get fed up to the back teeth having to trawl through pages and pages of dross,unsubstantiated lies, overexuberance,and,sometimes, blatant dishonesty on Advfn. Certainly not a BB for the weak of heart - stalkers galore as I can personally attest.

Am a big fan of your daily Small Cap blog though, despite crossing swords on other matters and have recommended it to many.

Most of my investments blue chip focused (outside of the minefield that is Oil of course where diworsification seemingly often doesnt work!) , mainly UK and US.

Edward Croft

Thanks Damian... I'm utterly paranoid about the StockRanks eventually underperforming as I use them 100% as my own investment system - so I'm constantly researching their qualities. I do appreciate that sharing and popularising them is perhaps shooting myself in the foot, but given the persistent behavioural biases everyone has which make us avoid high ranking stocks I think the anomalies will persist a long time.

Dart Group popping 18% in a day is a classic example - nobody expected it to keep trucking.. while from the readership stats here there's clearly thousands fully loaded into this classic story stock Synety. Why wasn't everyone buying today's highest ranking stock - H&T Group ? I doubt many did... it's a pawnbroker and its peer Albemarle & Bond went bust.... you'd have to be a brave man.

I find the behavioural side of the StockRanks fascinating... everything about them is contrary to human nature... we avoid the fear & loneliness involved in buying cheap problem stocks, can't bear buying new highs and particularly avoid the boredom of buying safe, dull stocks. Seems so many of us prefer to go bottom fishing with everyone else in exciting pre-revenue growth stocks !

underscored

So exemplified today by Synety (LON:SNTY) vs Bloomsbury Publishing (LON:BMY). I have to say that despite having multiple monitors and fancy data viewing tools, every time I have to try and understand complex data at work, I go straight to the printer and then crack out my trusty ruler and yellow highlighter... Something about "feeling" what I am reading, I wonder if the multi-millenia history of books is finished just yet? Maybe I am just a dinosaur.

Damian Cannon

Hi Ed - paranoia is good you know as the 'market' really is out to get us! As time has gone on, and the track records have extended, I've very much got on board with the idea of assessing different metrics (quality, valuation, momentum) and linking these to the often illogical biases that we all labour under.

It's easy enough to listen to Warren Buffet talk about keeping his powder dry and only buying when everyone else is running scared but it's a whole heap harder actually acting on these thoughts. Along these lines, and in retrospect, I should have invested everything but the kitchen sink in 2009 and yet I didn't and why not; fear and uncertainty mainly along with a sense that I couldn't quite trust myself to decide what to buy.

Like you I find human psychology fascinating, particularly as it pertains to investing, and I'm only too aware of my own weaknesses; which is why many of my recent purchases (Spaceandpeople (LON:SAL), RTC (LON:RTC), £NG. £PPH) have been in stocks with ranks above 80 and in spite of any recent share price strength. I've definitely come around to the idea that upwards momentum is worth having and I find it a bit strange that I used to favour shares where the price was falling!

Oh and I do have some Dart (LON:DTG) and it is one of my top-ten performers - although not quite as good as Man (LON:EMG) in recent times! As for H & T (LON:HAT) it's a really interesting prospect; they have survived where so many others haven't and recent results show a much improved balance sheet; so I actually am tempted despite the sector!

Cheers.

19th Mar '15

Hi,

Going back to Tom W's rant on Synety (LON:SNTY) yesterday, there were actually some quite major factual inaccuracies in what he said. So I have posted a reply on his site. Just in case it doesn't make it there (which I'm sure it will), I have copied my response below;

Hi Tom,

There are a number of factual inaccuracies in your Bearcast today attacking Synety, so let me correct them;

1. The company had enough cash to last until about Aug 2015, and a small top-up of c.£1m would have been adequate to take them to breakeven in 2016. Now if you want to take a very extreme view, I suppose you could call that being bust, but to most people I think a modest top-up fundraising would be seen as par for the course with an early stage growth company. They only needed to raise about £1.5m, hardly a king's ransom. They decided to raise another million on top of that, for additional sales people, because they are getting a rapid payback of about 5 months on new salespeople added.

2. The historic figures look awful, but are in line with the business plan. This was a start-up about 2 years ago, so revenues are building rapidly, but from a low base. This type of technology start-up business will incur losses in the first few years. That's the deal that shareholders fully understand, that's what we have signed up for, and should not come as a shock to anyone, other than people (as you admit you are) who have done no research on the company.

3. Annualised Recurring Revenue (ARR) is basically the most recent month's revenue multiplied by 12, which gives the current run rate of revenue (and bear in mind revenue is recurring - being billed monthly, has a very low churn rate (customer retention rates are very high, especially for larger customers), and is high margin (gross profit is over 70%). So this is the best measure of the company's current performance, not the historic figures.

4. Therefore, as ARR rose 247% in 2014, it's meaningless to look at the £1.63m total revenue for the year. What you should be looking at, is that at the start of the year ARR was only £0.87m, but by the end of the year it was £3.02m. It has since risen to £3.46m in just the first two months of 2015. So this is a very rapid growth company. ARR should be say £6-8m by end 2015m, rapidly bearing down on the breakeven level, which is £9-10m revenue.

5. This rapidly accelerating revenue also means that cash burn is reducing each month. So the £400k+ per month that you mention for 2014, again was skewed by the big fundraising in April, at which point overheads were greatly increased, to push for growth. As I'm sure you understand, it's overheads first, then the sales come through, which is exactly what is happening, as planned.

6. The company has NOT missed its forecasts by a mile. In reality sales growth is on target. Overheads are a bit higher, but not massively. The main miss in the cashflow is that they are finding much greater retention rates with larger customers (as opposed to small customers with just one or two users), BUT it takes about two months to set up larger customers, which has opened up a two month gap on cashflow. The good news is that the churn rate on larger customers is tiny - so they are clearly the best customers to go for, which is what Synety is now focused on. So a positive in the medium to long term, but has a short term cashflow impact.

7. The £1.4m contingent consideration which you refer to, in current liabilities, is NOT a cash outgoing. It is payable in shares, to a maximum of 740,861 shares, as disclosed in the last Annual Report. These things need to be checked before you fire a factually incorrect broadside!

Overall, I appreciate that Synety is not an investment that will appeal to most people. The reason I hold shares in it, and took part in the 90p fundraising recently, is because I use the product (cloud telephony which integrates with multiple CRM systems, and keeps recordings of all customer calls integrated into that customer record on your CRM system). It's absolutely fantastic! The most impressive stat is that 70% of people who try the product on a 14-day trial go on to purchase it. The product pays for itself in cheaper phone calls, if you spend £50pm on calls. The new Chrome browser plugin is fantastic, and will accelerate CRM integrations.
You really need to try the product to understand what the appeal is. When people use it, they love it. So that explains why sales are growing fast.

Has the company handled the fundraising well? No! They made a total mess of it. There was no need for such a deep discount, and obviously the accounts being delayed 3 weeks sent all the wrong signals to the market. This is what caused the share price to drop from 200p to 90p. So obviously I'm annoyed about that, but the value of the company hasn't changed at all - in fact the KPIs have been GOOD in the last 3 or 4 months. Therefore the share price should, once the dust has settled, recover.

I would say the guys running Synety are very clever, very committed & hard-working, but they are not good communicators (they're too immersed in the tech stuff), and they've made mistakes in handling fundraisings, budgeting, etc. Hopefully the recruitment of Peter Simmonds, the outgoing CEO of DotDigital, as new Non-Exec might inject some additional expertise into the company, on better control of the finances, and how to properly present the company to the City & investors.

At £11m market cap, fully funded to breakeven in 2016, I would say the shares are looking a bargain now. It's counter-intuitive, but when everyone is tearing their hair out, saying what a terrible company it is, that is often the best time to buy, PROVIDING the company has enough cash in the bank, which after this latest fundraising, it does.

I would say though, that patience is wearing thin with management, and they have GOT to make this work. If they come back for more money next year, then it will be carnage. So very much a case of high risk, high reward, definitely not for widow's & orphans! Having said, that, I'm pretty comfortable that doubling my stake at 90p is going to look a smart move this time next year.

Love the bearcasts, by the way - compulsive listening for me, every day. Although maybe a bit more research is needed sometimes, before flying off the handle?!

Regards, Paul.

Henry Walpole

Thanks Paul, out of interest is your write up based on discussions you have had with Synety (LON:SNTY) management since the results came out or is it purely based on information you have gleaned elsewhere?

Kind regards
Jon

Hi Jon,

Synety is one of my larger investments, so I keep a close eye on it, including talking to the company about once a quarter.

The frustrating thing is that they're actually getting a lot right, and the KPIs are looking good - strong sales growth, and sales per user are rising very nicely - indicating that customers are happy with the product & use it more as time goes on.

Trouble is, they made a serious error by not raising enough cash last year - they assumed that any follow on funding would be easy to get, and would be at a higher price. They also didn't want to see their own personal shareholdings diluted too much at 250p - which has obviously backfired in spectacular fashion. Remember that management have been buyers of the stock at much higher prices - see 31 purchases at mostly much higher prices in last 3 years. So the Directors went all-in some time ago.

It's high risk. high reward. Although I remain of the view that now is by far the best buying opportunity we've ever had - the business is nicely advanced, proven (they could slash overheads & run it for cash if necessary), now has enough cash to get to breakeven, and yet the mkt cap is the lowest it's been since they started.

These things are often the opposite of market sentiment - it's when people are most negative about a stock that you sometimes get the best bargains.

Regards, Paul.

CliveBorg

It's lovely living in yesterday isn't it? Any thoughts on Puricore, Paul? (interesting news tomorrow - sorry, today)

Thanks Paul, appreciate the reply.

I agree with your sentiments and this too is one of my larger investments.

I think the new (ex-Dotdigital) NED Peter Simmonds could have a very positive influence here.
This interview with him back in 2012 is interesting https://www.youtube.com/watch?v=e1cVKzh6dtQ
If you skip to 4:20 he talks about partnering with CRM companies in the US as part of Dotdigital's expansion plans, something very relevant to Synety.

Dotdigital subsequently went on to be very successful in their US expansion.

Kind regards
Jon

MichaelFBS

Hi Ed

These posts are turning into one of the best ever on Stockopedia. May be you should link to it on the home page?

I dont suppose you would mind expanding in "I use them 100% as my own investment system"? Does this mean you only invest in stocks with stocks with Stockrank of over x? (Where x is 90 or 95etc?)

Thank you.

Thegrimester

Hi Ed,

Thanks for your posts very interesting

I can see the benefits of the Stockrank system in picking shares but have you done any analysis to see when is the best time to sell. Presumably an obvious fall in Stockrank would most likely occur a long time after the event for example bad news causing a major reduction in SP and therefore momentum rank. By the time the stockrank reflects the current state it is I assume too late to sell.

Any thoughts?

P.S any updates on the possibility of Stockopedia ETFs? (not that I am lazy)

I personally don't get Synety (LON:SNTY) and it is not one for me, mainly because I don't understand it and I don't mean understand what it does but what makes it a good investment long term. I can not see the barriers to entry or the moat. Additionally I can see one of the big boys (Apple, MS, Google) coming along and beating them at their own game. As I tweeted yesterday (https://twitter.com/MBroomSmith/status/578184866442919936) I admire Paul for his conviction and though he says he likes to have a small part of his portfolio in more exciting (bluesky) stocks (though later Paul says this is second largest holdings) I think he must have balls of steel to invest in stocks like this.

Now Bloomsbury Publishing (LON:BMY) is a company I think I understand. This is about content not physical books Paul, so it does not matter whether physical books are declining in sales if they are bing replaced by ebooks which empirical evidence for the general market would indicate that the are (see http://finance.yahoo.com/blogs/the-exchange/the-book-industry-isn-t-dying--it-s-thriving-with-an-ebook-assist-191025547.html) and as Jack Besoz is quoted as saying "Amazon Kindle owners buy more books than they did before they owned the ereader". Certainly that is true in my case. And I would have though (if Amazon does not take too big a slice) that this could be ehancing to Bloomsbury's bottom line.

So the question is whether Bloomsbury Publishing (LON:BMY) can keep or increase its share of this market. The stats for Harry Potter series are extraordinary (see www.statisticbrain.com/total-harry-potter-franchise-revenue/). And if it was JKR was to write another HP......

So Bloomsbury Publishing (LON:BMY) rather than Synety (LON:SNTY) is much more the type of stock I would like to own and it has a Stockrank of 97.

20th Mar '15

Hi purpleski,

It's not an either or for me (Synety OR Bloomsbury Pub.) - I would happily own both.

I hold about 50-60 stocks in my portfolio, of which at a guess I'd say around three quarters are good solid, high StockRank type shares. Indeed, I get a warm glow when I look at the StockRanks, and say, "got that! got that!", etc, as I look down the list!

However, I also like to allocate about 10-20% of my portfolio for high risk/high reward stocks like Synety. I fully accept that most of them won't work, and might lead me to exit with my tail between my legs, and a 50-75% loss. BUT, the odd one will pay off massively.

So you can't really compare the two approaches. It's chalk & cheese. Of course, it would be crazy to construct a whole portfolio of shares all on speculative stuff (although lots of newish investors do exactly that, and learn the hard way it's not a good idea!).

If you like looking at early stage growth companies, and you make the occasional multibagger, then I think it's a good idea to allocate a small part of the portfolio to multibagger chasing. 10% is fine for me. Sometimes I push it higher. Incidentally, I've bought a ridiculous amount of Synety (LON:SNTY) in the last week. Why? Because risk/reward on it, even short term, is great. 90p was the fire sale price that people who didn't want to invest at all (Instis) coughed up fresh money at. So will it go below 90p? Very unlikely. Yet the KPIs are good, so there is a high chance the company will release really good KPIs over the summer, once the dust has settled over the fundraise.

Therefore I see hardly any chance of SNTY shares going below 90p in the next 6 months, but a very high chance of them going up 50%+ on the release of continued positive KPIs. That to me, is superb risk/reward, with a (say) 6-month timeframe.

If I'm right, and the price goes up to about 140-150p in the summer, then I will sell most of the shares I've bought at the bottom this week for a big profit, and continue running my long term shares.

You don't have to form a fixed view on any share. I like to trade around a core holding. Especially when everyone else is beyond depressed, but is totally blinded by the short term share price movement, as in this case. The fog will clear, and people will suddenly realise it's fully cashed up, and it's dirt cheap. So I see an opportunity.

Regards, Paul.

Thank you Paul for taking the time to reply. Very informative.

I completely understand your point of view but would only add that:

1. The value of my portfolio is such, that in my opinion, I don't have the funds to allocate part of it to these higher risk stocks.

2. It would be exciting to see one of these multibag I don't think at the moment I have the mental resilience to watch several of them drop 50%/60%/70%/go to zero

3. I am not a full time investor (I have my own business to run which for half the year takes hideous amounts of time 7 days a week) so I struggle to find the time to research blue sky type projects so that I can understand the business properly and see why it makes a good investment.

4. I don't have enough time to fine a large enough number to spread the risk inherent in these type of stocks.

5. Though I am new (4 years max and very much part time) I also tend towards the concentrated portfolio school of thought (I have 15 stocks and 30% in cash). But I am still learning and adapting my thought processes.

That said your arguments are very compelling and it is tempting to invest £1,000 say just to stay in touch with the stock and where it might go - for a bit of fun

As ever thanks for great column and I think this one combined with the comments is one of the best ever.

Regards
Michael

cholertonandrew

Thanks for your views on Synety. I had been really positive on the company's prospects so its good to see I'm not in a minority of one.

I'm shocked at the issue price. Do you feel there's any chance that the price reflects a significantly changed landscape in terms of competition? Also do you know if there were any structural reasons preventing the directors from taking part in the fund raise?

Thanks
Andrew

Hi Andrew,

The Placing price at Synety was indeed a huge shock to all of us. I believe it was originally intended to do the Placing at about 150-160p, but there just wasn't an appetite for stock at that price with Instis. Plus the market got wind of the fact that something was wrong, as the results were delayed - which is always bad news. So the share price started falling, and potential investors in the Placing just kept lowering the price until a level was found where the company got the money it needed. I was staggered when I heard it was 90p.

That said, a decent set of KPIs in the coming months could easily see the share price recover strongly.

I have heard that the Directors were not permitted to take part in the Placing, on advice from the broker - they were inside, and in a close period. They ARE however able to deal now, and they ARE able to participate in the Open Offer. There were 3 Director buys annouced today.

I have collated all Director buying, taken from the company's website (see below), and you can see that they have spent £757k buying shares since Oct 2012, mostly at higher than the current share price. Mostly when the company was at a much earlier stage, and had very low sales too.

Hmcg

23rd Mar '15

Great discussion. Synety On my watch list now.

Paul I bought VCP a couple of years ago as it looked cheap on book value. New mgt team have driven share price ever higher. Any opinions on VCP? Cheers.

Hi thanks for this, its really helpful. I had wondered about the close period but didn't know.

I still like the stock and will hold on. I had topped up around 130p but that might look ok this time next year. I'm a bit worried they might need another cash top up next year but lets hope for a strong year of growth which would give them a much stronger hand even if its needed.

Regards
Andrew

Small Cap Value Report (18 Mar 2015) - SNTY, BMY, ACSO

Synety (LON:SNTY)

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

63 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...