Nobody is ever going to get rich by buying into IPOs

In Wednesday's blog, I wrote the following:-

 "I would argue that nobody is ever going to get rich by buying into IPOs"

Today a company called Bagir Group, which recently listed on London's Aim market, provided the perfect illustration as to why I avoid IPO's like the plague.

Bagir Group has barely been listed for more than a year. On the first day of dealings the share price stood at over 60p, but quickly lost value. After the release of today's interim results the share price has plunged even further, and currently languishes at 3.75p.

So what exactly has caused today's plunge? In short, losses of over $3m coupled with this trading statement:-

"The Company has made good progress in developing revenues to replace its previous largest customer during the six months to 30 June 2015. However, as noted above, the Company expects the second half of the year to be more difficult than the first half due to competitive pressures and the deferral of sales planned for 2015 into 2016. As a result, the Company expects trading for the second half of the current financial year to be significantly worse than the first half. "

Now using ADVFN's figures the group has a current market cap. of £1.9m. The company describes itself as a designer, creator and provider of innovative formalwear tailoring with it's Head Office based in Israel.

Last reported revenues came in at £97.0m and so ultimately with a £1.9m market cap. it may turn out to be bargain of the century from these levels, and some investors may wish to stick it on their monitors and carry out some further investigation into the company's fundamentals.

Personally, if the recent listing wasn't enough to put me off in the first place then the fact that it's Head Office is overseas certainly would.

I love seeking out and buying interesting micro-cap companies listed on Aim that look good value, but overseas based recent IPO's I wouldn't touch with a barge pole.

Actually, if you had shorted each and every foreign based IPO that listed on Aim you would have made an absolute fortune.

As an aside I often hear investors heavily criticising the Aim market almost as if it's rotten to the core. Of course, it's no such thing. Like any other market there are good, bad and indifferent companies, and if you look hard enough you can find some absolute gems. However, you do have to wonder how on earth so much rubbish appears to have made it onto the market?

Parsortix system impressing the medical world

I have written several blogs in the past about my investment in a company called Angle. This was a speculative investment that I made in 2012 when the share price had fallen back to around 26p-27p from memory. Certainly, this investment is paying off so far with the current share price around 76p. I am hopeful that the share price will continue to rise sharply from this point, particularly after today's news:-

http://uk.advfn.com/news/UKREG/2015/article/68629375

To summarise, this is a further example of  the  Parsortix system's far superior performance to the existing competition in providing a liquid biopsy for personalised medicine in prostate cancer.

Andrew Newland says, "This is the first peer-reviewed publication in a scientific journal in relation to the clinical use of ANGLE's Parsortix system. It adds to the growing body of published evidence of the system's performance as a liquid biopsy in a range of cancers including ovarian, prostate and breast cancers."

As the results of each independent study are released, I am getting more and more confident about my investment here. What particularly strikes me is the excitement from the medical community who specialise in the treatment of a number of cancers.

These comments from a news release in April this year clearly demonstrate the medical community's enthusiasm:-

http://uk.advfn.com/news/UKREG/2015/article/66496043

"Dr Eva Obermayr, Principal Investigator at the Medical University of Vienna, commented:

"The Parsortix technology contributes to the unprecedented specificity and sensitivity of the overall approach, by providing a high purity CTC sample. Parsortix is a label-free technology, and as such may become the gold standard for ovarian cancer diagnosis. By combining the Parsortix technology with qPCR analysis, we achieved an unprecedented high detection rate of cancer, even in early stage patients, where conventional diagnostic methods failed."

Professor Robert Zeillinger, Head of the Molecular Oncology Group at the Medical University of Vienna, commented:

 "It is now evident that the Parsortix system has wide application not just in ovarian cancer but in breast cancer and other gynaecological cancers as well. We are delighted to be working with ANGLE to bring this new capability to our patients as soon as possible."

A more extensive study into Parsortix's system is about to get underway with Ovarian cancer patients, and should the results be repeated then it opens up the clinical market in ovarian cancer with sales potential for the Parsortix system in Europe and the United States in excess of £300 million per annum. The whole market opportunity for all cancers is estimated to be worth in excess of £8bn.

Angle is currently valued at around £45m. Of course, it is almost impossible to value the company at this stage, but with luck and continued good progress then the company is potentially worth many multiples of this value if it can achieve both research and clinical sales in the future.

Funding is in place for the medium term.

My feeling is that given the increasingly positive results coming through from key opinion leaders, Angle will be snapped up by a predator in the not too distant future at a significant premium to it's current market cap.

I continue to hold the shares with increasing confidence.

Eckoh's of my own investing strategy

In my very earliest investing days I remember receiving a circular from a company whose name escapes me now. However, I do remember that in the circular there was a raft of information about micro-caps which were listed or about to be listed on the LSE. I don't remember too many of the companies that were mentioned, apart from one called Eckoh. I tended to concentrate my efforts on medium and large cap. shares at that time, and certainly never entertained purchasing any of Eckoh's shares. Times have changed of course, and now I like to focus my attention on the micro-cap sector of the market. Yes, it can be perceived as more risky and there will be inevitable disappointments, but the rewards can be phenomenal. With a little bit of luck and judgement  the winners will dwarf your losers, and even one or two multi-baggers will enable you too easily outstrip the indices year in and year out even if the others are duds. Anyway, I digress.

Eckoh plc caught my attention today because they have just released a positive sounding trading statement.

http://uk.advfn.com/news/UKREG/2015/article/68611575

The key summary line is:- "We remain confident that the high levels of growth seen in previous years will continue through the new financial year and beyond with current trading remaining in line with market expectations."

Today I am not looking at the current investment case for Eckoh, but the parallels between it's fundamentals and the type of companies I try to identify.

Firstly, a look at Eckoh's chart will tell you that the company hit the market towards the end of the 90s on a far too heady valuation. This is far too often the case, and I would argue that nobody is ever going to get rich by buying into IPOs. By the early 2000s the share price has plummeted, and then went nowhere for several years. However, look at 2009 onwards. A multi-bagger. Timing is crucial. These are the situations that I often look for. Interesting businesses where investors have lost patience, but where the company looks like it is about to turn the corner.

What else though? Well for me, sufficient cash on the balance sheet and a company that is capable of producing good cash generation. Little or no debt. High gross margins. Securing contracts with blue-chip and/or reputable companies/household names. A bullish outlook statement.

Now take a peek at Eckoh's final results from 31 March 2010.

http://uk.advfn.com/news/UKREG/2010/article/43300791

The share price chart from this point tells it's own story.

Will the story continue from here? Certainly the trading statement is encouraging. I haven't re-examined the most recent fundamentals so I've no idea if the current valuation is cheap, expensive or about right? I'll leave that to your own further research, but investors who bought shares at Eckoh's lows will have done very well indeed.

Will we have to wait until the 22nd Century......?

I last wrote about 21st Century Technology in January 2014, and since they released their half-yearly results yesterday, I thought I would take a look and see if the new management team had made any progress. In my last report, I mentioned that over the years C21 had been somewhat of a serial disappointer:-

http://michae1mouse.blogspot.co.uk/2014/01/21st-century-technology-plc.html

A quick glance at today's share price would appear to suggest that despite a change in the management team, it remains a poor performer.

So what did yesterday's interims look like? Well not entirely impressive or convincing in my opinion. Firstly, underlying profit was down to just £30,000 from £250,000 in the comparable period last year. Gross profits were £2m on reported revenues of £4.7m. Net cash had fallen to £1.3m from £2.6m and the basic and diluted loss was 0.38p per share.

If you strip out goodwill and intangibles on the balance sheet then NAV is zero.

The company usually generates good operating cash flow, but at the interim stage, there was an outflow of £362,000.

Russ Singleton, CEO of 21st Century plc did provide some positives for shareholders with the following statement:-

"We have made good progress in the first half of the year as we continue to implement our strategy to become a broadly-based systems Integrator in the transport industry. In line with our strategy the acquisition of RSL is serving to diversify earnings, add software capability and move the Group beyond providing individual solutions to our customers.

"First half trading encountered delays in the delivery of a rail contract which is now due to be delivered in in H2. As a result revenue for the second half is due to grow significantly and is underpinned by a GBP4.5m order book. We are currently undertaking a planned retendering for a major bus contract and therefore continued to be exposed to some risk. However we believe our strategy is sound and therefore look forward with cautious optimism."

Whilst there are positives to draw on going forward, they do operate in a highly competitive arena and given their past performance, I can't see anything attractive enough to make me want to invest at the moment. Current management have skin in the game and therefore have plenty of incentive to turn things around, however it may take longer than anticipated.

In many ways, the current situation at C21 reminds me of the task facing Belgravium (mentioned in yesterday's blog). Turnaround situations are unpredictable by their nature with no guarantee of eventual success. I am happy to have sold my shares and deployed my money elsewhere for the time being. The market always presents other opportunities.

Disappointing results from Belgravium....Bull and Bear points for consideration

Belgravium Technologies released their interim results this morning. They are very disappointing.

More than anything I was unhappy that the dividend has been scrapped with no mention of the potential acquisition. As a reminder, in their final report they hinted that if the acquisition did not go ahead then a dividend would be reconsidered. As it happens neither has occurred, and no reasons are given.

I first mentioned Belgravium Technologies back in 2013 where I said that I had been accumulating at prices below 3p. I gave my reasons for my purchases in the blog below:-

http://michae1mouse.blogspot.co.uk/2013/08/13-rise-for-belgravium-technologies.html

The share price did achieve a high of around 5.5p, and my initial optimism appeared to be justified with improving results. Sadly, the recovery appears to have run out of steam, at least in the short term anyway.

I sold my entire holding this morning for a small profit. Whilst I am a long term holder by nature, I constantly re-examine the reasons for my original purchases and will continue to hold or add if the story remains in-tact and sell when it changes. From my original blog (link above) you will see that my original reasons for an investment are no longer valid.

Whilst revenues at the interim stage are not drastically down many of the other measures are certainly less attractive.

The company is going to be loss making for the full year after restructuring costs. Cash on the balance sheet has fallen to £414,000 and the net tangible asset value is around £1.8m.

As the new chairman states, "the Company has a strong cash generative ability and maintains a conservative balance sheet."

He also says:-

"Our plan is to reduce the cost base by approximately £500,000 on an annualized basis and make the business more effective."

He goes on:-

"This year will therefore be a year of transformation. As we move into next year we will be moving out of this current period of consolidation and restructuring. Next year and subsequent years will benefit from a much lower cost base, coherent structure and a new energy."

Ian Martin may well be just the man for the job, he certainly did well with Avesco and I do like this statement:-

 "To conclude, although financial results in the short term may be disappointing, the changes that are now being made are essential to the future prosperity of the business. In a turnaround situation it is always difficult to predict the actual point when the benefits will become visible, but change is happening. We are investing in our future and have not been afraid to sacrifice some of the present to do so."

Plenty of bull points remain and there is always the possibility of a takeover. However, this was not one of my larger holdings, and since there are always opportunities elsewhere, I have decided to take my small profit here, run my winners and invest in new opportunities.

Belgravium was a pick of mine to double this year at 4.25p, sadly it doesn't look like the best choice after today's news. Never mind you can't win them all, and when you're choosing micro-caps you should expect some disappointments.

It's worth remembering that it's your portfolio performance that counts not individual shares. Simple maths tells you that if you choose let's say ten micro-cap stocks and eight break even with just two 5-bagging then your portfolio has grown 80%. In fact, two 5-bagging and eight going bust still leaves you at break-even. Of course these should be worst case scenarios and in reality with research, judicious stock picking, a bit of luck and patience you are likely to do extremely well.

One to watch.....?

Very little news around this morning, as is often the case on a Friday, but a contract win by a company called Newmark Security did catch my eye.

Newmark Security describes itself as a leading provider of electronic and physical security systems.

This morning they announced a $6m contract that had been secured for the delivery of Workforce Management Technology.  The contract is for a period of 10 years with guaranteed revenues of $6m over the first five years.

I have briefly had a look at Newmark Security in the past, but never been tempted to buy the shares. The company is valued at around £18.2m on a fully diluted basis with £4.2m cash on the balance sheet and a tangible net asset value of  £4.9m.

The company generated a very healthy cash flow from operations last year of around £4.6m, and has very little debt on the balance sheet. FCF was around £3.2m with makes the current valuation look very interesting on a multiple of 5.7 times.

In addition, EPS came in at 0.43p on a fully diluted basis putting the shares on a historic p/e ratio of just 8 times earnings. The company pays a dividend which was increased by a third from 0.075p to 0.1p giving a current yield of 2.7%.

All of these figures look very attractive, so what's the catch?

Well, in the final report they say the following:-

"Overall, we believe that the profits of the Group in the current year will be lower than that for the year ended 30 April 2015 whilst we build up new markets and products from which the benefits will be seen in the following year and beyond."

Unfortunately, I am unable to find any broker forecasts for 2016 and beyond, but as a medium to long term prospect, it's one I'll add to monitor and carefully watch progress.

Temporary dips in revenues and profits can produce excellent buying opportunities in small/micro caps since they often mask the longer term prospects. I like their confidence in raising the dividend pay-out and, as already mentioned, operating cash flows look very attractive indeed.

Take a butcher's at this one.....

Crawshaw Group is an easy business to understand, it's a fresh meat and food-to-go retailer. This morning the Group released a positive trading statement saying,

"like-for-like sales have been particularly strong in the last quarter, with the growth being realised across the entire estate. This has been accompanied by a strengthening gross margin position"

and adding that they:-

"now expect the Company to exceed market expectations for the year ended 31 January 2016".

Good news indeed. An investment made since 2012 will have been handsomely rewarded.
Chartists and momentum traders will no doubt be attracted by the rising chart that appears to be reaching new highs today.

The company is currently valued at around £57m. The company made a operating profit of £1.1m last year and reported EPS came in at 1.3p putting the shares on a historic p/e ratio of 55. Looking at forecast figures for 2016 and 2017, brokers have predicted pre-tax losses but significantly improved revenues. The estimated dividend yield for 2016 and 2017 is just less than 1%. If I was interested in investing I would definitely conduct more research on those figures though.

Cash stands at a very healthy £9.1m, and tangible net assets at around £12.3m. The cash  generation was around £1.5m last year. The Group is debt free. In their last report they said,

"It is a very exciting time for the business and whilst short term profits will be held in check for a while as we add infrastructure costs ahead of the curve, we very much look forward to reporting on our progress as we build scale as quickly as practically possible."

and today's statement indicates that they are delivering on this.

Whilst Crawshaw is not a company I shall be investing in, they appear to be progressing nicely and it will be interesting to see if they can deliver substantial profits in the long term.

Not quite sure why Directors have been recent sellers of their shares without stating any specific reason though?

On the current fundamentals, the company does look expensive, but of course the jury remains out until they have built the significant scale that they refer to.

Something for bears and bulls I would suggest, but certainly the trading statement provides encouragement for the bulls and momentum, at least in the short term, remains in an upward trajectory.

High barriers to entry.........and gaining traction?

Another company that I hold a modest stake in is Avanti Communications. This morning they released their full year results that were in-line with market expectations. Revenues were up 30% to $85.2m  with a recorded loss of $73.1m. EBITDA (before share based payment charges) increased to $16.0m from $1.7m in 2014.

Avanti is a speculative investment, but I am pleased that the company does appear to be gaining traction and I am encouraged with the progress that is now being made.

In the past Avanti has been a popular target for short sellers, chiefly because of the company's significant debt pile and slower than hoped for progress.

However, I have maintained my modest holding in the company throughout the oscillations in it's share price in the hope that Avanti will eventually reach it's full potential. As they state in today's report, "We have now invested over $1.2bn in developing a business that can meet the huge latent demand for affordable connectivity in high growth markets. Together with the investments that we will make over the next two years, this will create a company with the potential to generate over $500m of EBITDA once the fleet is filled." Clearly if this can be achieved then with the company currently valued at £300m, the shares have multi-bagger potential.

A big factor in my holding the shares for the long term is neatly summed up in the following two paragraphs of today's report:-

"The satellite industry has very high barriers to entry. These include the intellectual capital that is needed to design and run a satellite network and the requirement for orbital slots and spectrum.

 

The risks to Avanti's business model through technological change are low, primarily due to the very long lead times needed to develop and launch new satellite technologies."

 

If you couple the above with the following:-

 

 "Avanti is no longer regarded as a new entrant. We are delivering excellent service for our customers using superior technology, today. Our technology platform is proven across our markets and our brand is understood and well regarded."

 

then it's possible to envisage that the company is on the way to reaching a tipping point in uptake for their services.

 

Risks remain of course, but having come this far and with a recent significant backer in MAST Capital Management, LLC, a Boston-based investment firm, I remain cautiously optimistic and shall continue to hold.

 

 

 

"Open doors" that needed a far bigger push

In November 2013 I wrote a small article about a company called Synety that I had made a modest investment in:-

http://michae1mouse.blogspot.co.uk/2013/11/synety-very-promising-speculative-stock.html

As I mentioned in the article, this was a highly speculative investment which didn't meet my usual investment criteria, but a number of factors encouraged me to follow the Directors lead and buy shares in the company. At first my speculation appeared justified by their rapid progress from a low base, and the share price shot up accordingly:-

http://michae1mouse.blogspot.co.uk/2014/03/ubc-media-trakm8-and-synety.html

However, the story hasn't quite panned out as management and investors hoped. Clearly, "pushing at open doors" has resulted in a few slamming back in their faces. In short, an overly optimistic management team, high cash burn, and subsequently a deeply discounted fund raise (around 90p) scuppered the expectations of early investors and decimated the share price from it's highs of around £3+ in February 2014. Management have since recognised the importance of trying to reach cash flow breakeven as soon as possible by adopting a change of strategy.

This morning Synety released their interim results where investors can assess their current progress. The results broadly paint a positive picture of their prospects in achieving their revised aims. The positives are that the user base is up 104% compared to the same point last year and 28% since the year-end, revenue is up 130% vs the same period last year, operating expenses are tracking in line with the Board's expectations and annualised monthly cash absorbed by operations is decreasing. Simon Cleaver, the Executive Chairman asserts that, "The Company has cash and cash equivalents of just over £3m at the end of this reporting period, which the Board believes will, on the current trajectory, be sufficient to reach cash break-even."  Since the year end annualised recurring revenue has improved from around £3m to £3.9m.

Cleaver also states that, "Whilst the Group's change in strategy did have an impact on new orders received in April and May whilst staff were retrained and internal systems amended, I'm pleased to report that the Group has witnessed a strong recovery, with June and July being the strongest months to date for new sales. The Group's sales teams on both side of the Atlantic are now building strong pipelines, which is encouraging for the remainder of the year."

In my view the group still has it's work cut out to achieve cash break-even and an operating profit. That said, they are clearly getting there quite rapidly which means that even in the eventuality that they do need to raise more cash in the future then the scale of the cash raise should be minimal, and with a supportive shareholder hopefully not at a deeply discounted price. It's also worth remembering that whilst there haven't been any Directors purchases in recent months, they do have significant "skin in the game".

In early trading this morning the share price rose 9%. I'd guess that early investors who have been disappointed by the rate of growth have sold into this strength and the share price has since fallen back to 91p.

On balance, I would suggest that the price is about right for all the known information, but if they can manage cash break-even by the year end and continue with their growth trajectory then there is plenty of upside potential from here. Gross margins of 77% and recurring revenues streams will provide significant operational gearing if they can hit their targets.

I continue to hold.

If you're looking for security..........try this tiddler?

Croma Security Solutions is an Aim market tiddler that made it onto my monitor when the share price was in the low 20s, but never made it into my portfolio. That's a shame because it is a small company that is progressing very well, and indeed the share price is now around 47p (at time of writing) and I believe has further to run from here.

This morning Croma released a RNSNON which I'd imagine has been missed by most investors. The announcement relates to two significant contract wins with a Healthcare Institution and a major London based property group, worth £1.5m and £1m per annum respectively. Furthermore, the Directors state that they "are increasingly confident about the prospect for Croma Vigilant in both the short and medium term."

What particularly captured my attention was this assertion from Sebastian Morley, the Executive Chairman. He commented: "These contracts have been awarded to Croma in the face of sharp competition. Although our offering was not the cheapest, we won because of our luminous difference as the ex-military security professionals. This is becoming a welcome theme for our business and we will aggressively spread this message to companies who demand the highest standards for their security services."

Since the interim results were released in February this year, they have also announced 4 further contract wins with Odeon, Hilton Hotels, the second largest bank in the UK and a Saudi Arabian customer.

Croma describes itself as a total security services provider. In their interim results they announced revenue up 14% to £8.8m,  diluted EPS up by 92% to 1.44p (six months to 31 December 2013: 0.75p), net assets at £9.1m  (31 December 2013: £8.7m), cash at £0.68m  (31 December 2013: £0.84m) and they declared a maiden dividend of 0.3p per share with the promise of a final dividend.

The current market cap. of Croma is around £7m. Broker forecasts for this year and next are for revenues of £15.3m and £15.7m with EPS at 3.3p and 3.8p respectively giving forward p/e ratios of 14 and 12. The balance sheet is sound, although if you strip out goodwill and intangibles then net asset value is around £2m. The company appears to generate cash, although at the interim stage there was  a slight outflow due to changes in the net working capital.

All in all, for investors interested in good value micro-caps I would be inclined to believe that Croma warrants further investigation. I might add that I don't hold shares in Croma, but would consider picking some up on any significant price weakness, however that does appear unlikely in the short to medium term.