Small Cap Value Report (5 Aug 2016) - MTEC, CALL, BOOM

Good morning! Right, let's get this show back on the road.

Today I intend reporting on;

Matchtech (LON:MTEC) - trading update for y/e 31 Jul 2016

Cloudcall (LON:CALL) - Interim results to 30 Jun 2016, and another Placing

Audioboom (LON:BOOM) - interim results to 31 May 2016

I'll also have a leisurely stroll through yesterday's RNSs, later this afternoon, and will update on anything interesting.

Matchtech (LON:MTEC)

Share price: 361p (up 6.9% today)
No. shares: 30.9m
Market cap: £111.5m

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

Trading update y/e 31 Jul 2016 - this is a recruitment agency, specialising in the engineering & technology sectors. In common with some other smaller recruiters, its shares have been really slammed hard over Brexit fears. So personally I held back on buying more, as I assumed something must be going wrong.

However, today's update begins with an (ambiguous) confirmation of performance;

The Board expects profits to be in-line with its previous expectations.

What do they mean by "previous expectations"? Is that different to current expectations? If so, in what way?

Total NFI (Net Fee Income) is up 45% to £73.2m for the year ended 31 Jul 2016. The big rise here is due to the acquisition of Networkers International, which was a major acquisition.

There's an excellent research note here from Paul Hill of Equity Development, which is well worth a read, because it includes graphs on competitors, as well as for Matchtech. This note points out what good value Matchtech shares appear, and that it is far less cyclical than some investors seem to think. Although he does rein in his forecasts to essentially flat earnings for the next 2 years. That's probably sensible in current uncertain economic times.

Valuation - based on 43.7p EPS for 2015/16, the PER is 8.3 - clearly good value.

Dividends - a particular attraction of this share is the good dividend yield. Based on a forecast payout of 22.8p this year, that gives a nice yield of 6.3% - which looks sustainable to me, because it's twice covered, and also the balance sheet is strong (see below).

Net debt - is £27.5m at 31 Jul 2016, down 18.2% from a year earlier.

Although it should be noted that net debt is up 10.9% from 6 months ago. It's not a problem though, as debt is sensible relative to profitability.

Balance sheet - is fairly good, with NTAV of £26.7m. There's a healthy working capital surplus, with a strong current ratio of 1.76. (figures based on most recent interim balance sheet, as at 31 Jan 2016).

Outlook/Brexit - another company which says Brexit has had no impact (so far anyway), and the CEO sounds cheerful about the future;

"As I reported at the time of the Interim Results in April, demand for skilled engineers remains strong in the UK and, notably, we have yet to see any impact on vacancy flow in the six weeks since the EU Referendum.

"We have seen strong growth in our Engineering division and, in Technology, the market segmentation and sales restructuring we have undertaken in the IT business has given us confidence for the new financial year.

My opinion - I'm very relieved by today's update, which is better than I was expecting. Buying at this level will also lock in an excellent, twice-covered dividend yield, so I think it looks very attractive right now.

That has to be tempered by the possibility that the economy could slow. This looks to be an overwhelmingly UK business (90% of turnover, in the 6m to 31/1/2016).

I see management are intending on pushing ahead with the name change to Gattaca. The CEO says;

"Our proposed new name, Gattaca, is a sign of our ambition and I remain confident that we will convert the exciting opportunities available to the Group into growth."

Make of that what you will. Gattaca means nothing to me, but there we go. Still, as long as the divis keep flowing, I don't really care what they call it!

Cloudcall (LON:CALL)

Share price: 61.75p (up 11.3% today)
No. shares: 13.5m + 6.56m Placing shares = 20.1m post Placing
Market cap: £12.4m

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

Placing - I became aware of the fact that the company was doing another Placing about a week ago. Therefore, because I respect the rules (even though I disagree with them), I have kept silent about this Placing until it was announced this morning - as one should always do, no exceptions, if you become aware of price sensitive information. More importantly of course, it is illegal to trade in any share where you possess inside information. These rules have to be strictly adhered to, and I wish they were more robustly policed.

The Placing has gone a lot better than I expected - my fear was that the disappointment of another Placing, when the company had previously emphasised that it was funded to breakeven, would be met with fury by Institutions. Instead, they have lapped it up, with an over-subscribed Placing at 57.5p, amazingly a 3.6% premium to last night's closing price of 55.5p.

It's still burning about £3m p.a. in cash, based on today's comment;

The Company's cash position at 30 June 2016 was £860,000, compared to £1,524,000 at 31 December 2015, with an outstanding R&D tax credit receivable of £480,000 (subsequently received in early-July). Average monthly cash burn from operations for the first 6 months of 2016 was approximately £262,000. Monthly cash-burn from operations continues to trend downwards as revenues grow, and operating expenses remain stable. The Company's previously announced £900,000 term loan facility with Barclays has now been drawn down in full.

So clearly the cash position had once again become tight - with only about 5-6 months' cash left in the kitty (after including the £480k tax credit received in July), and with the £900k Barclays facility having been fully drawn down.

It says that growth has been constrained by the focus on conserving cash, so it clearly makes sense to raise more money - in order to pursue a focussed (one key client/introducer called Bullhorn). Although it is disappointing that, once again, the company has failed to meet its forecasts on cash burn.

Interim results, 6m to 30 Jun 2016 - this is a rapid growth, but still cash burning situation, so the figures need to be seen in that context.

H1 turnover rose 61.7% to £2,269k - impressive growth against prior year H1.

Sequential growth - ie. comparing H1 2016 with H2 2015 - is less impressive, at +19.7% (£2,269k vs. £1,896k) - so clearly growth is slowing - blamed on cash constraints.

High quality earnings - recurring revenue is 84% of the total.

H1 2016 loss before tax of £1,812k is actually worse than the loss in H1 2015 of £1,737k.

The company benefits materially from R&D tax credits (a cash receipt remember), so note the £700k sitting on the balance sheet in respect of this (of which £480k was received in Jul 2016).

Balance sheet - clearly cash was getting tight again, as noted above - so another fundraising was necessary.

Outlook comments are upbeat, focusing on the growth potential with key client Bullhorn;

"I am happy to report that the focused strategy implemented during 2016 is now delivering a much stronger sales pipeline, an increasing and reference-able client base and much greater clarity of product roadmap. With the additional funding enabling the business to invest in resources to deliver on this progress the board looks forward to the future with significantly increased confidence.

"While the board is pleased with the progress being made in all areas of the business, within the confines of our resource restraints, what we are most excited about are the accelerated growth opportunities that will now be available to us as we leverage the funds from the Placing announced today and upscale our resource, particularly in the US, as we focus on key channel partners and larger customers.

My opinion - clearly this investment/punt has not gone well. The repeated failure to meet growth targets, leaving the company repeatedly short of cash, is a lesson in how not to do things.

As a general point, I think cash burning companies need to get fully funded, with a 20%+ contingency on top, right at the start. They should raise more money than they need, to ensure the project actually happens. Relying on repeat future funding rounds is a crazy strategy, because it just causes more dilution & investor anxiety for the future. Market sentiment can turn on a sixpence, so companies cannot rely on investors being prepared to inject more funds in future. Look at how tech unicorn CrowdMix recently went bust, after investors refused to support its latest (insane over-priced) £100m valuation fundraise. People woke up & smelt the BS.

On this occasion, I think CloudCall has got away with things very lightly. Personally I wasn't prepared to put in any more funds, unless it was at a very deep discount. I spoke to one of the Institutions in this share last week, who was surprisingly upbeat about the company - saying that they have a big opportunity now the whole thing is more focused on Bullhorn & other specific large clients.

I think management here have used all their Get Out Of Jail Free cards, and have borrowed a few more from other players too! So really if they can't get this back on track in the next 6 months, with new funding, then heads will have to roll.

The danger I see is that the only way to drive growth is to add more overheads. So cashflow breakeven becomes a moving target, disappearing towards the horizon. I need to see much stronger progress towards breakeven. If that is delivered, then this share still has the capacity to go through the roof. At least the latest fundraising was done at a sensible price, so existing holders have not been disadvantaged.

Personally I'm prepared to give it another 6 months, and if progress has been inadequate by that point, then I'll chuck it out & move on.

Generally speaking, jam tomorrow shares like this are the biggest fixable leak from my portfolio performance. This is why I try my best to avoid getting sucked into new things like this any more. Sticking to sensibly managed, profitable, growing companies just delivers much better results for me personally.

Audioboom (LON:BOOM)

Share price: 2.4p (down 9.0% today)
No. shares: 535.7m
Market cap: £12.9m

Interim results 6m to 31 May 2016 - I'm almost speechless after reading these figures - they're diabolical!

H1 2016 revenue of only £329k

Cost of sales £328k

Gross profit £1k. Yes, you read that right, a grand.

Overheads required to generate £1k in gross profit? That'll be £2.6m.

So a loss before tax of £2.6m. For the half year

They're nearly out of cash too - just £931k sitting on the balance sheet at 31 May 2016.

Cash burn was £2.2m in H1, so that implies the company must now be pretty much completely out of cash, 2 months on from the interim period end. Will it be able to make the payroll at end of this month?

Receivables (debtors) of £831k on the balance sheet seems mighty odd, considering turnover was only £329k in H1. So it looks as if customers aren't paying up - or maybe there's some other stuff in there too? It doesn't look right to me, anyway.

Breakeven target for end 2017 looks like pie in the sky to me.

Funding - clearly it's out of cash, and there's a going concern note included with today's results - which seems to be saying that a further fundraising is needed to survive for another 12 months.

Also note that;

...the Company is currently exploring equity funding options

My opinion - there's a very high risk of a 100% loss here. The company, and hence its shares, are now totally reliant on being able to raise fresh funding to continue with the prodigious cash burn.

The alternative would be to drastically slash cash burn, which means getting rid of people mainly, and that costs money in termination payments.

I like Audioboom's App, and think there's a place for it, as a spoken word audio platform. However, there's no sign at all of it being a viable business. So the only hope now is for some deep-pocketed investors being prepared to continue funding substantial losses, probably for years to come.

If nobody is prepared to fund it again, then it'll go bust.

Risk:reward looks absolutely appalling right now, for existing shareholders. I really hope no readers hold this share, as it looks terribly close to a potential wipeout. Personally, I'd ditch them. You can always buy back in (possibly a good bit cheaper too), after the next fundraising, with the downside risk eliminated. Why take the risk?

UPDATE: Thanks to Tim for pointing out that a Placing has also been announced today. I didn't spot that, as I search for results & trading updates only.

Here are the key points;

• 120.2m new shares to be issued at 2.5p - a modest discount in the circumstances, in my view.
• Raising £2.56m before expenses - so enough for about 6 months's cash burn.
• Relocating staff from UK to USA & India - key markets.
• Nearly half of the Placing funds are coming from Nick Candy (40m new shares = £1m) and 2 Directors (11m new shares = £275k).

There's also a third RNS, called Strategic update - saying that the company is "currently in discussions with a Chinese fund" (not named) of up to $7.5m into the company, plus a $500k loan to the CEO for him to buy shares at the same price & time. So $8m going into the company in fresh funding, possibly. It's not a done deal yet.

Dilution seems to be under control, in that the potential deal is said to be "made at not less than 2.5p per share" - i.e. the same price as the small Placing announced today.

My revised opinion - the relatively small Placing announced today, assuming it completes, is enough to keep the company going for another c.6 months - so it's a help, but there's clearly still a big funding gap longer term.

The strategic investment from a Chinese fund sounds a lot more interesting, as $8m would buy them a decent slug of extra time - that's enough for more than another year's cash burn.

So the company lives to fight another day. Personally I would still want confirmation that the Chinese $8m is actually in the bank, before even considering this as a possible investment. Experience of AIM listed Chinese companies has taught us that you really can't believe anything that originates in China.

There remains absolutely no tangible evidence that this is a viable business. That Candy is only prepared to stick in another £1m suggests to me that he's not particularly confident either. I'll be happy to revise my opinion if & when the company produces some improved trading performance - in numbers that matter - i.e. profit & cashflow, not the whole glossary of technical terms set out today's results announcement.

I couldn't care less how many listens the company achieves, or how many users, etc visit their website or app. All that matters is where the cash is going to come from, and how much of it can be generated.

Another matter to consider, is that ad revenue is very tricky - I find that when an ad is imposed on me, as a user or anything like Audioboom, I resent it. So the effect on my perception of the brand placing the ad is actually negative. They've annoyed me, by bursting into my room, and starting to shout at me, if I had to visualise it. That's probably going to make me less likely to want to buy whatever they're telling me about - it's too intrusive.