Stilo results 2017/2018

Stilo International released their results on Thursday which were steady and in-line with what could have been anticipated from their interims.

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/STL/13567489.html

"8% increase in sales revenues to £1,894,000 (2016: £1,761,000).

·    Profit before tax of £309,000 (2016: £318,000).

·    10% increase in operating costs, net of capitalised development costs, to £1,578,000

(2016: £1,437,000).

·    Increased investment in total product development to £656,000 (2016: £538,000) of which £213,000 capitalised (2016: £204,000).

·    Improved cash position of £1,621,000 as at 31 December 2017 (2016: £1,466,000).

·    Final dividend proposed of 0.05 pence per Ordinary Share, providing an 11% increase in total dividend to 0.10 pence for the year (2016: total 0.09 pence)."

Not bad, but not spectacular either.

The outlook statement was mixed:-

"The Directors are aware that material orders from two key customers for OmniMark and Migrate will not be repeated in 2018 and the revenue shortfall will need to be offset by new business sales to maintain the current level of revenues. To support this we are undertaking additional investments in sales and marketing with the objective of further broadening the customer base and accelerating the growth of AuthorBridge.

We are encouraged by the sales pipeline for new business prospects, but at the current time it is far too early to know what the outcome will be for 2018. However, Stilo has the balance sheet, and product portfolio, not to shy away from incurring costs today in order to steepen the Company's long term growth curve and to deliver sustainable value growth to investors."

Firstly, let's deal with the contracts that have now terminated. The Migrate contract relates to a 3-year deal with a major semiconductor manufacturer which has now come to an end:-

http://swindon-business.net/index.php/2015/05/20/major-us-contract-boosts-swindon-tech-innovator/

and if the Omnimark contract is of a similar magnitude then the short fall in revenue will be around £300,000-£350,000 for 2018/2019. That's assuming they fail to convert sufficient business in the sales pipeline to make-up this short fall.

With an increased spend on sales and marketing, a worst case scenario, if they don't make up the revenues for the contracts that have now ended then it's possible they will just about break even or even record a small loss in 2018/2019.

So why would I continue to hold or buy? There are quite a number of good reasons:-

1) You need to look at the long term picture. It's a very small company and they'll undoubtedly have an occasional blip, but since I've been interested (2015), revenues, the cash balance and dividend payment have risen every year. That's a very good sign and the balance sheet strength keeps the company in good stead for an occasional disappointing year.

2) 100's of thousands of pounds make a big difference to Stilo's bottom line. 2018/2019 may turn out to be a poor year. However, as AuthorBridge is adopted by more organisations in future years, revenues will quickly pick up again, and profitability can shoot up very quickly on relatively small revenue increases. Gross margins are an incredible 99%. Therefore any dip in profitability can quickly and easily be reversed.

3) For a very small company, it's a pretty safe bet in uncertain times. It has a market cap. of a mere £4.5m, but boasts £1.6m cash, NAV of £3.7m, a dividend yield of 3% (and rising), it's profitable and generates cash. In other words, unless something catastrophic happens then bad news is already priced in. The company is debt free which adds another huge level of security.

4) Stilo has paid a special dividend in the past, and there is no reason that it won't in the future. It may make an acquisition. It has hinted at one or both in a relatively recent trading statement (May 2017):-

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/STL/13229595.html

5) It may indeed become a target for another company. Perhaps a much larger concern that already has a large sales and marketing capacity, and could accelerate sales of Omnimark, Migrate and AuthorBridge far more quickly. Imagine how attractive Stilo would be, I'd guess at this juncture an offer of £10m (more than 100% premium) would be a starting point.

Finally, as outlined, I have already run the figures through what I'd deem to be a worst case scenario, and believe that medium/long term, the upside potential is far greater than any downside risk. I'd guess that anticipated bad news is largely priced in for 2018/2019. Therefore any unexpected good news will see a rapid recovery in the share price.

Revenues, cash, and NAV have been growing in recent years, although this may not be the case in 2018/2019. However, at the moment, Stilo is attractive as a value proposition as we wait for future growth. If both eventually come together then that's when the larger rewards will happen.

For now I'm happy to hold and keep adding when it suits.

As ever my blog only records my own thoughts and does not offer advice.

A wolf in sheep's clothing?

When you first read a RNS in the morning, if it appears to be good news then it's a natural reaction to get quite excited. On the face of it, it was good news that BST released a statement yesterday to say IPSOS had injected £3m cash into the company via a placing at 18.5p. It was good news because BST's share price had fallen to a lowly 13p ish and the placing was at a very good premium. Yesterday the shares jumped up to end the day at 15.25p. Great.

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/BST/13552089.html

Is this great news for BST shareholders then or is this news a "wolf in sheep's clothing"?

Whilst the cash injection from IPSOS is good news particularly since the shares have been issued at the previous placing price (18.5p), the share price had fallen below this level for very good reasons.

The company reported revenues of just £0.5m at the half year (similar to last year) and will report just £1.3m for the full year. Cash diminished by just over £2m in 6 months.

Despite this the company is valued at over £11m following the issue of the new shares. It looks very expensive at this stage of it's development.

Reading the latest trading statement from BST, I believe one of the reasons that IPSOS may have invested is because of this extract:-

"work commissioned through IPSOS for major brands including McDonald's, Pepsi Cola, L'Oréal and Danone".

I don't suppose they wanted to turn to these clients and tell them that BST was going bust imminently, and they almost certainly would without the cash . I think an amount of "face-saving" may be involved. Certainly these are major clients for IPSOS and they'd be reluctant to let them down so quickly.

In yesterday's announcement, there are at least two further cautionary notes:-

"as the pipeline of prospective work increases, but a longer lead time to operational breakeven."

"Big Sofa intends to utilise approximately GBP0.7 million of the Investment proceeds to satisfy the repayment of the outstanding Convertible Loan (including any applicable interest), to the extent it is not converted into Ordinary Shares at the election of Eridge before then."

I can't see that this cash injection is going to last very long? If they pay off £700,000 then they're down to £2m, and by implication, cash burn will remain high (£2m during the half-year reported). I guess this injection on current information would last just over six months before further dilution.

As ever, this is not meant as advice to buy, sell or hold and they are just my opinions and reflections. Personally though, an £11m valuation seems very rich and there are profitable cash generative companies out there with good growth prospects that are a lot cheaper.