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

Wednesday, Mar 18 2015 by

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…

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63 Comments on this Article show/hide all

Paul Scott 18th Mar '15 4 of 63

In reply to post #94759

Hi billytk,

It's no good letting your emotions drive investment decisions. You just have to look at where the business is now, what it is currently valued at, and what the prospects are.

So in the case of SNTY, it has delivered results that are only very slightly below forecast. The KPIs are pretty much in line with plan too. The valuation is dirt cheap. What has gone wrong then? They just didn't raise enough cash last year, were short by a couple of million, and came back to the Instis for more, when they were in no mood to put in more. So the Instis demanded a big discount.

Has it been handled well? Not at all, as I said in the article, it's been handled badly. But is this a bad business? Not at all - it's growing very rapidly, building recurring revenues and is within reasonable distance of breakeven.

I don't believe in throwing the baby out with the bathwater. If growth was slowing to a crawl, then I would have no hesitation in throwing out the shares. But take a step back, and ignore the cash issue, and you'll see a business that is performing close to plan. They made a big mistake in not raising the cash needed to get to breakeven, but that's been fixed now.

Hence why at the valuation noted in today's article, cashed up now until say mid-2016, I think this is probably a great time to buy. Who cares what happened in the past, it doesn't matter. We are here now, and it's purely a question of whether the business plan is credible, and if the valuation is reasonable? I would say yes to both of those. But equally I totally understand why most people will disagree with me. I use the Synety product, which is probably one of the reasons I can see the potential here.

Regards, Paul.

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FREng 18th Mar '15 5 of 63

Kate Hanaghan at TechMarketView writes, re Synety (LON:SNTY),

"Regular readers will know TechMarketView frequently talks about the difficulties of making profits from a SaaS model. Indeed, even Salesforce – the original SaaS 'poster-child' – remains in the red, as do many of the other well-known SaaS firms. Synety's Board, however, remains “excited about the prospects" for this year and views the future with “optimism". We admire its positivity but without a shadow of a doubt very difficult times lay ahead. "

I'm neither long nor short, but this seems like another story stock, and very high risk, so I'm staying out.

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Paul Scott 18th Mar '15 6 of 63

In reply to post #94768

Hi dasv,

With respect, you wouldn't think the numbers were terrible if you had researched it, and knew what expectations were!! The figures are largely as expected.

So the £1.63m turnover is rapidly growing from a low base (this was a startup 2 years ago remember). So by the end of 2014 the run rate of turnover had reached just over £3.0m.

When you have very rapid turnover growth from a low base, the historic numbers look awful, of course they do. The business is valued looking forwards, not backwards. So the 2015 broker forecast (issued this morning) is for a leap[ in turnover from £1.6m to £4.4m, then £8.0m in 2016. The business reaches a breakeven run rate during 2016, and is then profitable in 2017.

It's a high growth tech co, so this share will not appeal to most people here. Has the business performed disastrously against what was expected? No, not at all. It's a little bit shy of forecast, and needs a relatively small fundraise - only a £2.8m Placing, which should have been a formality. It's been handled badly, hence the share price drop.

The share price will go up again if/when the KPIs show continued strong growth. The crucial thing though is to buy more at the lows, in my view, otherwise dilution is the killer.

Anyway, you can't judge it now - we need to look back in just over a year's time, and judge it then, on whether they have reached breakeven or not. If they have, then it's probably a multibagger from here (especially if you buy heavily at 90p, as I've been doing). Other people won't want to touch it with a bargepole, I totally get that, and that's fine. Whatever floats your boat! I like one or two high growth, speculative stocks in my portfolio, but am mainly focused on value/GARP.

Regards, Paul.

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dasv 18th Mar '15 7 of 63

"With respect, you wouldn't think the numbers were terrible if you had researched it, and knew what expectations were!! The figures are largely as expected."

I used to be a holder (speculating post IPO). I have looked at the company a few times.

true - I wasn't following expectations for numbers today.

But the figures are still terrible in absolute terms, whether they are unexpected or not.

So I disagree that I wouldn't think the numbers were terrible if I knew the expectations! Yes it's a start-up but with such a huge loss relative to revenue, the company has driven the sp into a wall by not cost-cutting earlier as revenues have been slow to grow (in absolute terms and in relative terms to cost, even if revenue growth is high percentage-wise, relative to the previous year).

"The business reaches a breakeven run rate during 2016, and is then profitable in 2017."

Will the placing be sufficient for the company to reach break-even, or will further placings be required? Same question for WAND and BLUR and n-stocks in the rest of speculative AIM BTW.

"It's a high growth tech co, so this share will not appeal to most people here."

I agree: this is called the Small Cap Value Report.

I don't think you can call SNTY a value stock, although you could argue the discussion is not about value stocks, but of the value of all stocks?

"Anyway, you can't judge it now - we need to look back in just over a year's time, and judge it then, on whether they have reached breakeven or not"

The market's participants continually make judgements or forecasts. My money would be on a further placing being required before break-even. Management could have seen this coming, should have managed costs better in advance, and as you say didn't raise sufficient capital earlier. Will management decision quality improve or remain the same? If you believe in the guys running the co. - that they will focus on costs as well as growing revenues, then there is a case for being long. I think I'll just be watching on the sidelines on this one.

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Edward Croft 18th Mar '15 8 of 63

By my simple quant standards across quality, value and momentum... Synety is amongst the 1% least favourable of stocks in the market right now.  I've unlocked the Synety StockReport here so that it's public - do peruse. 

Story stocks are a minefield for stock market investors,  one needs to be extremely careful about capitalising hope... There's a famous study by Rob Arnott that showed that while the stock market always valued the correct (future growth) companies at a premium, it never failed to overpay for the growth ! 

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Paul Scott 18th Mar '15 9 of 63

In reply to post #94786

Hi dasv,

The focus of these reports is Value & GARP. I write about what, in my opinion, are the best Value & GARP situations that I come across. I get more right than wrong, that's why thousands of people read these reports!

So with Synety (LON:SNTY), given that the market cap is now £11.4m AFTER this latest fundraising (that's assuming full take up of the Open Offer too), then I would say the company is a GARP stock.

If you look at cash, it would have existing cash of £2.4m at 31 Dec 2014, plus £3.5m raised today (say £3.2m after costs), which gives pro forma net cash of £5.6m at end Dec 2014 - half the market cap. Cash burn of £300k pm, means it should now be fully funded to breakeven. That cash burn should of course steadily reduce as ARR continues to rise each month.

The company could have taken a gamble, and carried on without a fundraising, but took the view that they needed to be certain of having enough in the bank to get where they're heading.

Moreover, with management having thoroughly screwed up this fundraising, I think they've now GOT to reach breakeven, and I am making that point directly to them. Another fundraising is not an option now, and they need to start being a lot more careful with overheads, in my view.

Regards, Paul.

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rick 18th Mar '15 10 of 63

Lets not turn this into an ADVFN bb discussion we get your point loud and clear dasv. Show some respect to your host.

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mrwhits 18th Mar '15 11 of 63

singer have updated on todays, note the breakeven on Q4 2016...

"Synety has raised £2.8m (gross), placing 3.1m shares at 90p with the potential for a further £0.75m from an open offer to fund continued acceleration in the growth of both the UK and US operations. Since the capital raise in Apr’14, Synety has grown its customer base by over 70% and users by almost 90%. The US office, opened in June, is delivering metrics which suggest it is following the trajectory of the UK with a much larger potential market. The additional capital will allow Synety to continue to expand its recurring revenue base as it develops a leading position in the growing cloud telecoms market. The software-as-a-service (SaaS) platform means that revenues at full run rate will generate a high drop through to profitability, which we expect to build substantially from breakeven in Q4’16, despite continued investment in growth."

no position.



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Paul Scott 18th Mar '15 12 of 63

In reply to post #94789

Hi Ed,

Sure. On the StockRanks, you would never buy any smaller, speculative share. Which overall would probably save us all money!! On the other hand, if nobody ever invested in smaller growth companies, and was prepared to fund the early stage losses, then most tech companies would have never got off the ground! (including Stockopedia! ;-)

Good ideas need funding, and it's high risk/high reward. There will be occasional multibagger, but most will be losses. Personally I tend to keep these high risk/high reward shares to less than 10% of my portfolio overall.

With Synety, I'm not sure that screwing up one fundraising is justification for saying that the company is rubbish. It's KPIs have actually been good, with strong growth in recurring revenues. So it's not actually a story stock. It's a small, high growth company which is currently loss-making. To my mind, story stocks are blue sky things, developing a new product. Synety is an early stage growth company - the product is out there, it works, and is high margin, they're now growing the user base rapidly. Again, similar to what you're doing with Stockopedia!

Regards, Paul.

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dasv 18th Mar '15 13 of 63

rick - ?? What is the point of a comment section if the merits of the stock in question may not be discussed? Yes: let's not turn this into an ADVFN bb discussion where any dissent is censored.


Paul - yes after today's fall SNTY may fall into the GARP category. Good fortune.

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lucien2k 18th Mar '15 14 of 63

Just sitting reading through their annual report and they do give some good detail in here.

Sales staff increased from 12 to 32 in 2014. 15 to 23 development staff and overall they doubled their head count from 41 to 82, doubling their wage bill. That is where their money is going.

Their staff don't seem to be super expensive for a tech company either, £51k per person.

With Microsoft making a mess of Skype, there's definitely potential for another company to capitalise. As Paul said, its about managing costs. If they can continue their sales growth, then in 6 months a new statement may look very good, especially if their new sales staff can deliver.

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Paul Scott 18th Mar '15 15 of 63

In reply to post #94795


No, no! I welcome a lively debate, and people can say what they want here! (it's fine to criticise me, I have no problem whatsoever with that). dasv's comments are absolutely fine. Critical opinions are often of more value than ones which reinforce ones own view, as they make you think again.

I completely take the criticism on the chin with SNTY, it's been a bad day, and they've messed up by raising money at such a discounted level, no arguments over that. My enthusiasm for the share has not worked out (so far), and I totally accept the criticism.

However, I'm also pointing out, that all is not lost by any means.

Regards, Paul.

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billytk 18th Mar '15 16 of 63

I’m ultimately happy that I hadn’t invested and have no inclination to enter today but I respect your views and hope it works out for you. They are closer to the bargepole list than the watch list today; mainly skewed by my opinions on management competence rather than the figures.

I do have a question about portfolio weighting though. You said that you will take part in the placing so as not to dilute your holding which I can understand but aren’t you just overly exposing yourself? You have previously said that Synety (LON:SNTY) was your second largest holding. You also said you were buying up at the 250p level which was the previous support level for the last botched placing. You must be having to put some serious funds into this company to not be diluted but how do you justify that with the re-balancing of your overall portfolio and exposure to such a highly speculative stock?

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janebolacha 18th Mar '15 17 of 63

In reply to post #94789

Ed, with what are effectively "story stocks", it's perhaps better to pick up on the story at chapter 2 or 3. The action never usually happens in the first chapter, anyway. After having my fingers burned a couple of times in the early days by the "Red-Hot Penny Shares" type of stock, I now only very, very rarely invest in companies that are story stocks or start-ups and seldom in "recovery stocks". BOOB (buy only obvious bargains) and TABOO (there'll always be other opportunities) are a couple of investing acronyms that have served me well.

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mrwhits 18th Mar '15 18 of 63


not sure microsoft made a mess of skype, they bought it, ran it for a while, didn't like it, closed it down and now offer unified comms via a far more integrated product called lync, which offers a lot more than skype did for the business office, i.e integration to exchange and office etc.


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Paul Scott 18th Mar '15 19 of 63

In reply to post #94813

Hi billytk,

I've doubled my position in SNTY at 90p, which is taking a risk, yes.
But for the reasons given, I think it stacks up as things stand today. Personally I don't get too hung up about what has happened in the past - I have a mental process to get rid of the emotional feeling on bad news as quickly as possible, within the first hour of bad news, and then focus on the fundamentals as if I were a new purchaser of the share today. The market doesn't know or care what price I paid, and what my view on the share was in the past.

So based on it now having more than adequate cash to reach breakeven, and the mkt cap being the lowest it's been so far, for the company in its current guise, and with the KPIs showing strong growth, then looking at it completely logically, 90p is probably the best buying opportunity there has been so far for this share. That's why I've doubled my position in it at 90p.

I haven't worked out what % of my portfolio it is yet, as I don't want to scare myself!

Regards, Paul.

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lucien2k 18th Mar '15 20 of 63

In reply to post #94819

They haven't closed down Skype, and I don't see them doing so in the future. Lync is MS's business product, they are also starting to push Skype for business more.

I've been using it for many years, its our company standard for IM communication and every time they do an update it seems to get worse. There are so many features that used to work almost flawlessly that now seem to break (sending files for example).

My thoughts are mostly based on anecdotal evidence but I have heard at least 10-20 people independently complaining about the same issues. Its a sizable percentage of the people that I regularly work with via Skype.

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MacroVal 18th Mar '15 21 of 63

Anyone that's interest should read back through the comments I've made on Synety previously after one of Paul's (excellent) blog pieces

Synety is a company with zero barriers to entry. Their product is laughable, and they have been releasing RNSs along the lines of 'We got a developer to do half a days work today and make two bits of kit talk to one another'

Reason there's no investor appetite - I could build their product in about 10 hours. Their only USP is that they have a friend at Salesforce - but I can't imagine they'll be friendly for very long.

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Ramridge 18th Mar '15 22 of 63

In reply to post #94789

Hi Ed
As human beings lots of studies have shown that we are hard wired to be optimistic. 

There is a very entertaining TedTalk on this subject by Dr Sharot "The Optimism Bias" here.

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gstocks 18th Mar '15 23 of 63

In reply to post #94780

I agree with you as regards the long term prospects, but I do have reservations regarding the cash burn rate and whether another placing will be required before break even.
Another point which on balance dissuades me is the mention of delays of 6_8 weeks in
'Customer provisioning' which I presume is setting up Synety's systems up for the customer to start using the service. This could be the real bottleneck, and as an operational issue could stall growth.
It worries me.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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