A de-listing? Bring it on!

I've written about Stilo International several times in the past. It's a tiny company with a market cap. around £2.3m. The share price has bounced up and down for years, and currently sits near its all time lows. It's disappointing since I had high hopes for Stilo, and have written very positively about them in the past.

There are two key reasons that the share price is currently languishing at 2p. Firstly, growth suddenly stalled in 2018 after looking like the company might be reaching an inflection point. Through 2015, 2016 and 2017 revenues had been steadily growing and although EPS had remained flat due to increased development costs, the company boasts 99% gross margins and it doesn't take too much imagination to see how quickly operational gearing would have kicked in and increased sales would have dropped to the bottom line. Alas in 2018 revenues suddenly dipped, and although the company was still profitable, growth had stalled. Unfortunately, sentiment was not helped by the following comment in their preliminary report, "2019 is going to be a challenging year for the Company, with potential demand, as always, difficult to predict at the current time."

The uncertainty regarding trading in 2019 coupled with the following hint that management may favour a de-listing i.e."Given our size, we continue to incur significant financial overheads associated with being a public listed company, but notwithstanding this we were able to generate a post-tax profit for the period of £177,000.", "spooked" investors and decimated the share price.

If you don't like the possibilty of holding shares in a de-listed company then I'd suggest you stop reading now. However, if you're more adventurous then read on.

My feeling from the tone of the 2018 prelims is that management would be happy to de-list. Indeed why wouldn't they be? Currently the shares yield a 6% dividend, a dividend that has incidentally doubled in the past four years. In fact, it rose 20% this year (a dip year) which indicates huge confidence in the long term future and an extremely robust balance sheet. In essence, de-listing would save them a further £150,000 per annum which is enough to double the current dividend immediately i.e. a potential 12% yield. That's mouth watering! It should be noted that the Directors hold around 25% of the shares and consequently a (potential) double digit dividend would be highly appealing. It should be noted though that they would need the support of all their major shareholders to secure the 75%+ votes to enable a de-listing to happen.

For such a tiny company, the balance sheet is absolutely superb. Cash stands at £1.3m and there is zero debt. The NAV is £3.8m (TNAV is £1.3m) against a current market cap of £2.3m, although if you do your research I believe the true value of Stilo is very significantly higher.

From the prelims, it suggests that their trading statement in May will be lacklustre and it's possible that they might even try and persuade investors to back a de-listing. I'm comfortable holding or even adding whatever happens.

Stilo has excellent financials and the potential to restart their growth trajectory again. Whilst growth may not resume this year, I very much suspect that the medium to long term looks far more rosy.

The shares are already highly illiquid, so any potential de-listing won't improve that situation but by way of compensation you just might get a double digit dividend yield!!

As a final note, I'd add that I've never held a micro-cap company before that was profitable, pays a generous and improving dividend that has doubled over four years and has a rock solid balance sheet.

I hope that they can regain their growth trajectory in the medium to long term because that would truly be very exciting whether they're listed or not!!

De-listing? Bring it on!!

It's not all bad thank goodness!

Hot on the heels of the 7digital debacle, I'm reporting a successful share sale in a company (to make myself feel better) which is the antithesis of 7digital. The company in question is Scientific Digital Imaging where I've banked a 3-bagger (203% profit to be more precise). I bought shares in SDI in December 2016, and have watched a wonderful success story where the management have done a great job in growing the company both organically and by acquisition. The company is profitable, cash generative and has a strong balance sheet. It's gross margins are very healthy at around 66%. As I said, the opposite of 7digital's fundamentals.

I love this company and believe it has far further to run, but I wanted to release some funds because I believe that there are bargains to be had and others that will materialise in the coming weeks or months. It's always a difficult decision to sell a company if it's performed well and I do believe in running winners, but the reality is that occasionally you need to raise cash for other perceived opportunities and you need to make choices. With SDI the compounding return for me after just 2.25 years was 64% per annum. If only all of my choices could do as well.

In further good news, One Media IP (OMIP) reported very encouraging interims today alongside the acquisition of a music catalogue:-

https://londonstockexchange.com/exchange/news/market-news/market-news-detail/OMIP/14033376.html

https://londonstockexchange.com/exchange/news/market-news/market-news-detail/OMIP/14033329.html

I don't envisage selling any shares in OMIP in the near future. Again it's a great little company with good growth prospects and excellent fundamentals.

As ever DYOR, and listen to nothing I say.

Liars, incompetence, and foolhardy choices

FFS I never saw that coming! Maybe I should have? I'll try not to be to harsh with myself, but I must show more discipline in future.

This morning's shock came in the form of a "Business Update" from 7digital. The previous CEO Simon Cole has just left the company after saying the following on 25th March, "I leave 7digital in good shape". It's now become obvious that he was referring to himself rather than the company, and has clearly been spending too much time at the gym since today's business update from the new incumbent says the following, "the Board's current view is that the business will require material further equity and/or debt funding in the next quarter without which the Company would be unable to continue as a going concern. The Board will assess financing options for the Company however, it is likely that this would entail significant dilution for shareholders."

I'm glad Simon's in good shape, and enjoyed his journey since it provides me with great comfort having today sold my entire holding for a whopping 94% loss overall. The only saving grace for me is that I wasn't suckered in by these rats when the previous share price collapse happened back in January. I have massive sympathy for those who were. In my previous two blog posts I had this to say:- 

http://michae1mouse.blogspot.com/2018/12/micro-cap-christmas-presents-or.html

"7digital (7DIG) - current sp 2.3p, market cap. £9.2m. Big promises but disappointing so far. Has had a habit of pulling defeat from the jaws of victory. Up until now it's been a big cash guzzler and diluted shareholders. Major acquisition should now be fully integrated? Cost savings will be £5m per annum? Gross margins should be 70%+ , and profitability just around the corner in a potentially exciting space. Market doesn't currently believe the promises, but if 7digital proves them wrong then expect a multi-bagger in double quick time."

Followed by:-

http://michae1mouse.blogspot.com/2019/03/the-micro-cap-update-3-months-later.html

"7digital (7DIG) have probably released more news than all of the others since December. Initially bad news including the termination of a contract with Juke a significant customer, and the non payment of a tax bill. The market was spooked and the shares plunged. However, since then they settled the tax bill and received a very healthy 4m Euro settlement from Juke, alongside announcing new contracts. The share price has recovered a little and stands at 1.18p (down 49%). Very recently there have been significant changes to the management team."

Given the newsflow, shareholders had every right to believe that, despite the January issues, the company was recovering and with a 4m Euro settlement received had enough cash for the foreseeable future at least. I can't even express how angry this makes me. At best it was financial incompetence, I'll let you surmise what it was at worst.

I don't care what happens to this company or it's share price from now on since I've been 100% wrong up until this point. However, given it's history then who in their right mind is going to stump up extra cash and/or lend them money when they've pissed so many millions up the wall already. Good riddance.

In terms of lessons learnt then I'm not going to be too harsh with myself, but I'm not best pleased either since this now ranks as my worst investment since DCD Media and there were some worrying parallels e.g. crap balance sheet stuffed with intangibles, ill advised acquisitions, management promises never fulfilled etc.

Firstly, in my defence I'd say that the company was beginning to generate very healthy revenues, gross margins were around 70% (very appealing for operational gearing), they were last man standing in Europe and profitability and cash generation was promised and appeared highly likely in 2018.

It's all "jam tomorrow" bollocks though really. At the 2018 interims, despite a healthy increase in revenues, losses were over £2.5m, net current assets were nearly minus £2m and they were still burning cash like it was going out of fashion. The fundamentals will always out in the end! I know this and must do better next time. 

I've been in this game for a long time now, and the successes are invariably those companies which have most of the following qualities:- Profits, good cash generation, a solid balance sheet, high gross margins, good management, dividend payments and Directors with "plenty of skin in the game". Small companies don't need to have all of them to pique my interest, but 7digital only boasted growing revenues and high gross margins. It's not enough.

What still amazes me after all this time is investors (including myself in this instance) chasing companies with none of the above and sometimes barely any revenues. 99% of the time it ends in disaster for such companies. 7digital being one of them. What on earth was I thinking?

Remember ignore all I say and do, but (just for myself) don't listen to bullshit by CEO's, sharetipsters, multi-handled bulletin board idiots, tweeters or any one else. It's always the fundamentals stupid with some potential for growth and a bit of luck thrown in! They might not always be multi-baggers, but some will be and the ones that aren't are unlikely to lose you 95% of your capital.

GLA, and commiserations if you own(ed) 7digital or indeed any other company that has lost significant value.