Small Cap Value Report (24 Sep 2015) - RM2, TUNG, WYG, NWF, PNA

24th Sep '15 by Paul Scott

19 comments 19580 reads

Good morning!

RM2 International SA (LON:RM2)

Share price: 44.6p (down 23% today)
No. shares: 322.7m
Market cap: £143.9m

Profit warning - this is a new company for me. It listed in Jan 2014, raising $218m, to fund its plans for creating a business manufacturing and selling/leasing a new type of pallet (clicking on the picture on the right will take you through to the company's website).

Advantages claimed (over conventional wooden pallets) are durability, strength, suited for automated warehouses, etc.

The trouble is, it's a blue sky share - so inevitably things go wrong - as per the update today - which explains a technical problem (with a friction coating) has necessitated changing to a gel-based coating. This means delays & reduced sales/profits:

As a result primarily of the decision to change to gel coating, the Company will not achieve the substantial upswing in production that had been expected to begin in Q3 this year and accelerate through Q4. This means that revenue and production numbers for the full year will be significantly below previous guidance. Production is expected to be not less than 2.5 million pallets in 2016, with a production run rate at the end of the fourth quarter of 2016 of c. 300,000 pallets per month. Based on current contracts and trials as well as discussions underway, the Company is confident of being able to deploy profitably all the pallets produced.

More detail is given. It sounds like a delay, rather than a disaster.

So what's the financial position like?

2014 results - these look scary! $2.0m revenue, and a $37.9m operating loss before IPO costs, which are obviously one-off in nature, and a $42.4m operating loss after IPO costs.

So the only thing that really matters, is how much cash is left? Unrestricted cash was $80.9m at end of 2014, which might sound a lot, but given that the cash burn is extremely high, and it sounds as if material revenues are still some way off, then the cash position could now be looking wobbly - it depends on how much they've burned through this year - will there be enough cash to support things through to large-scale production in 2016? What if more problems emerge & further delays?

Alarmingly, the company didn't release its calendar 2014 results until 15 June…

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JASPERTHEDOG

24th Sep '15

Paul,
I assume this is a typo on their part. It confirms the sloppy approach to reporting.
'Although the Company retains strong cash balances ($82.8 million at 31 December 2015) -'

monzo

Neil Woodfords fund has a 21% stake in RM2 so it certainly has backing

1James1n1

Paul,

Any thoughts on the recent slide in Stanley Gibbons (LON:SGI) and the trading statement issued earlier this week. Given that 2014 full year results were impacted by a large trade that was slated for the new financial year, this seems a repeat of jam tomorrow promises from directors. The trading statement appears to be setting up for a poor 1H result.

James

Oh! And may I mention FEVR as a blue sky s/u that seems to be well away. I hope so, as I'm long...

66barney

Hi Paul,

Not sure if they're strictly blue sky as they already have a product selling, but haven't Seeing Machines (SEE) consistently delivered in line with forecasts as they build the business?

Paul Scott

Jasper,

Fevertree Drinks (LON:FEVR) isn't blue sky though. It's a growth company that came to the stock market with an established, growing product.

Blue sky is things that are essentially start-ups, with little to no turnover. So a new product that is being developed & launched. Once it's launched, and is growing, and shown to be viable, then a company stops being blue sky, and becomes a growth company. That's how I look at it anyway.

Regards, Paul.

Hi james1n,

I didn't bother looking at Stanley Gibbons (LON:SGI) - I've never liked the concept of making money from rare stamps, as it seems such a ridiculous concept in the technology era - I doubt future generations will covet stamps in the way collectors do today.

Also the company is dependent on individual, high value transactions - so will always be vulnerable to profit warnings.

Regards, Paul.

MichaelFBS

Thanks for the lesson on Blue Sky companies. I will remember it and avoid.

RM2 International SA (LON:RM2) "the company didn't release its calendar 2014 results until 15 June 2015" - Should all companies not be obliged to report say within two months or three months at the most as part of the listing rules?

In France where my small private business is also registered, I have to submit my accounts to the tax authorities within 3 months of the year end.

One could argue with a larger company with a dedicated accounts department and modern accounting software that accounts could be produced very very quickly - 1 month even.

Rusty2

Another company with poor results today is Brainjuicer (LON:BJU). Stockranking is quite high.

TheWatchmaker

Paul, Applause are due for apologising for your previous enthusiasm for Tungsten - it's never easy to say "I was wrong".
Don't be too hard on yourself. We all get some wrong and you have never claimed to be a tipster.
Keep up the good work.

billytk,

Good point re Woodford holding 21% of RM2. So that would make it much more likely that the company could raise more equity funding if it needs it.
Also, the obvious point that Woodford has a superb track record, so the stock could well be a long-term winner if he's checked it out & likes it.

Although I don't think that necessarily makes it a good investment now. I'm happy to let Woodford take the initial risk, we can always join the party later, and maybe on more favourable terms. Plus we can sell if we want to, if something goes wrong, whereas he can't (not without collapsing the share price anyway).

Regards, Paul.

Hi TheWatchmaker,

Kind remarks, thank you.
Actually, I genuinely don't find it difficult any more to admit I was wrong, on the occasions when I get it wrong. All investors get things wrong, so why on earth would you not admit it, if you clearly were wrong? That would just be obstinate, and pretty stupid really.

Admitting that something is a mistake, and chucking it out, is a very important skill for investors to attain, as it's not something that comes naturally to some people. Humans seem to have a tendency to want to cover up mistakes - but how on earth are you going to improve at anything, unless you are self-critical?

I keep two little notebooks by my desk. One is called "Share ideas", where I jot down key points about interesting-looking shares. The other is called "Mistakes" - where I jot down the key points that I should have spotted & reacted to, but failed to, with investments that have gone wrong.

Re-reading and adding to the "Mistakes" book is very important - as it helps remind you of things to look out for with other investments. I'm not saying we should beat ourselves up over our mistakes - quite the opposite really - admitting a mistake to yourself & others, and apologising to anyone who followed you into the stock (their decision, but it's still nice to apologise to them anyway) - is cathartic, and helps you draw a line under that mistake, and then learn the lessons from it.

I still regularly replay all the things that went wrong in 2008 through my mind, not for self-flagellation, but instead to make damn sure that those mistakes are not repeated!

We can't properly learn lessons from books, you have to actually experience the pain of a big loss to learn from it. People who don't admit their mistakes often never learn from them - you only have to go onto advfn bulletin boards to see people still completely in denial about the terrible investments they made, and blaming everyone but themselves for their utter stupidity. It's common to read people blaming short sellers - which again is all about blame transfer, as they lack the emotional maturity and intelligence to recognise & admit their own investing mistakes.

This is why you can often still exit from failing companies at a reasonable price - because the dumbest holders of the stock are actually buying more, rather than admitting that they screwed up.

All fascinating stuff - it's as much about the psychology, as the figures! Probably more so actually, in the short term anyway.

Regards, Paul.

steviej

Ref the amount of time taken to publish results: RDS published unaudited 2014 results on 29th January.

If they can do it....

cg78riverside

Hi Paul, any chance you could take a look at TTR interim results out today? Tricky one to fathom out due to the impact of the POCT

Richard Goodwin

Paul, you used to be a fan of Zanaga LON:ZIOC but I haven't seen you mention it for a while. Would it be safe to assume that you gave up on it?

Hi Richard,

Yes, I sold Zanaga iron ore many moons ago, approx 16-18p from memory, once it became clear that the project wouldn't stack up, in the light of the collapsing price of iron ore.

We discussed it here in the comments, at the time. You must have missed that discussion.

I would never continue holding a share, once the economic viability of the company had disappeared. That was simple to track, by following the price of iron ore online.

Zanaga looked great at $130 iron ore, but at $60 iron ore, it's moribund. Option value now, plus it has cash. So prob too late to sell now, might even be a speculative buy, who knows?

Regards, Paul

FREng

SCISYS (LON:SSY) have released interims today, following their earlier profit warning. It looks as though they have set things up nicely for a strong recovery in the second half. I'm long, as I have met the management and believe they know what went wrong and that they have the business under control.

CMWilliamson

Hello Paul

You looked at the final results for Air Partner (LON:AIR) on 30 Jan and concluded they could be worth a look. Do you have any comments on today's interims? They have been hitting StockRank highs for several months

Thanks

Colin

Igotts

Re RM2 it's worth going back to the Admissions document to see what they said about markets. I'm not a pallet expert, but there are some anomalies to me.
1 They state they are only competing in the upper part of the supply chain with one-off or there & back trips, which must be a small part of the overall market, but all the market figures only seem to cover the whole pallet market and not just the sector they are shooting for.
2 They then talk about pallet use in retail sector and shop floor, which isn't the upper part of the supply chain.
3 They think the upper end of the supply chain uses lower quality pallets, but they are building big production facilities for glass fibre pallets: are they intrinsically cheaper than wood or are they relying on the weight advantage making them use less fuel? And then they add on high end pallet tracking to a cheap product??
Enough queries in my mind: it would be good for someone with real market knowledge to pull this apart.

Small Cap Value Report (24 Sep 2015) - RM2, TUNG, WYG, NWF, PNA

RM2 International SA (LON:RM2)

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Paul Scott

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