Madness? Probably, but profitable madness.

A man who writes this vitriol about a company and his losses is surely not daft enough to even contemplate a punt in the same company at any future date? Only an idiot would do such a thing.

https://michae1mouse.blogspot.com/2019/04/liars-incompetence-and-foolhardy-choices.html

Yes I'm an idiot or maybe not so much actually? I'll explain, and I'll keep it brief.

On Tuesday, 7digital released a trading statement. If you read my blog regularly you'll know I am extremely au fait with this company.

I read the statement several times, and decided to risk some "punt" money. The market took some considerable time to react to 7digital's news, and hence I managed to purchase at below 0.2p. The shares finished up a little on the same day and advanced a little more on Wednesday. On Thursday the share price went berserk. I sold and took a 78% profit. If I'd held until Friday then I'd have made twice as much profit. Slightly galling, but a very successful trade nonetheless. I wish I could do that every week.

What next then? No idea short term, but here's my thoughts.

I know this company very well. I like the technology. I've always liked the story. I love the gross margins. The trading update gives cause for hope, but context is everything.

Things I liked. Trading for 2019 is in line with management expectations and their new strategy is performing well (apparently). They've significantly reduced operating costs. They've secured much of their expected revenues for 2020 and should achieve operational profitability by the end of the half year 2020. Plenty of positives and fortunately for me it clearly enticed many short term traders.

What could possibly go wrong?

Firstly, since I've been following 7digital, they've often said they're on the verge of profitability. Vintage 2018 trading statement:-

https://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/7DIG/13527293.html

"Following the acquisition of 24-7 in June, operational restructuring has already begun and has resulted in the closure of the Company's office in Paris and a reduction in headcount. The Board is pleased to report good progress towards its goal of profitability in the current financial year." 

Didn't quite happen. In fact the company nearly went bust.

Secondly, despite all the positive noises, where are the figures that matter in the latest trading statement? There is no mention of cashflow, cash remaining or indeed revenue for 2019.

They have raised money over the last 12 months, but if you take a look at their last interim statement I can't for one moment imagine it'll be enough? They lost £3m between January and June 2019, and their balance sheet is just awful. They had a negative net asset balance of around £7m. Horrendous even after considering the cash they raised during the year.  My guess is another major dilution is on the way. The last one was at around 0.2p.

I've no idea what will happen to the share price in the short term, although after such a hefty spike I know what normally occurs. What I can say is that at the current £12m market valuation and a very good chance of further dilution and losses for another 6 months before the possibility of operating profitability, I'll stick to the sidelines again and watch for developments. There are some great little micro-caps that are currently priced less than 7digital with much stronger balance sheets. Some  already having achieved profitability.

Having been wrong about this one in the past, I don't offer any advice and maybe 7digital will pull the proverbial rabbit out of the hat, but with the share price having already 3-bagged in as many days, other options appear a better risk/reward unless they release earth shattering transformational news!

As ever, DYOR and this blog doesn't offer advice.

Good luck if you're a holder.

33% increase in the dividend with more to come?

Here's my second post in as many days after a self imposed hiatus of several months, and it's another update. The company in question this time is the minnow Aeorema Communications (AEO) which I previously wrote about in July 2019. Here's the blog:-

http://michae1mouse.blogspot.com/2019/07/dividends-can-keep-you-happy-whilst-you.html

So what's happened since that time?

Well most significantly full year results were released 30 Sept, and the share price has risen 46% on well received figures and an encouraging outlook statement. Despite the share price appreciation, I believe that the shares are still significantly undervalued.

Firstly, as anticipated in my previous blog post, the dividend was hiked by a more than healthy 33%. It currently stands at 1p which is a coupon of 2.6% at the current share price of 38p. It should be noted that management have a progressive dividend policy in place.

Revenues were up 40% to £6.7m with a profit after tax of £288,000. Cash in the bank was £2.2m.

Not bad in the context of this company's market cap. still being a mere £3.4m. The P/E ratio is therefore around 12. The FCF for the year was £774,847.

Think about the cash in the bank and cash generated in the context of the current market cap. and the investment case is very compelling. The dividend is covered more than 8.5 times by the FCF.

They had this to say about this year's outlook,

 "Focus remains on sustaining client relationships and effective client acquisition to ensure that a robust pipeline of business is in place. To this end, I am confident of future growth having already secured new client wins in the current financial year including a leading global law firm, a number within the technology sector and a high-profile, established confectionery brand. Another upcoming highlight is set to be the execution of an extraordinary event at MIPCOM in Cannes, an annual trade show for entertainment content, in October for a global media brand. "

The MIPCOM event was for the BBC btw and it's a three year project. I'd urge readers to take time and read their full report:-

https://londonstockexchange.com/exchange/news/market-news/market-news-detail/AEO/14245785.html

In particular, although this was a very successful year for AEO (as illustrated in the figures above) they say the following:-

"Whilst the Group has delivered an unusually high number of low profit margin events during the year, new events to be delivered in 2020 are expected to have higher gross profit margins."

A share price at least double the current value wouldn't be unreasonable at this stage in my view assuming growth remains on track.

As ever, AIMHO.

OptiBiotix (OPTI) - I'll continue to avoid

I haven't written a blog post for a little while now but thought I'd revisit a company that I've suggested was grossly overvalued 4 years ago. Has anything changed my mind in the intervening period or was I correct in my initial assessment?

I will let readers be the judge, but in my own opinion the past 4 years has borne out my initial summation and I'd still give this company a wide berth. It's still hugely overvalued. The company is a little outfit called OptiBiotix. Here was my last blog post in October 2018:-

http://michae1mouse.blogspot.com/2018/10/theres-no-nonsense-like-bulletin-board.html

When I initiated a thread on ADVFN (16 March 2016) the share price was around the 73p mark. It is currently down 30% from that date following today's trading update:-

https://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/OPTI/14387837.html

https://uk.advfn.com/cmn/fbb/thread.php3?id=35291865

Let's look at today's update. Firstly, revenue for the full year is a paltry £808,000 which is just £266,386 better than last year (£541,614) a company with a ludicrous valuation of around £43m. Of course there is no mention of losses incurred during the year as is always the case with such companies.

If you read the trading update in full and take time to digest the information then you'll notice several red flags. I'll take them in turn.

1) There is great play on other income of £617,000 during the year from the sale of shares in a holding in their spin off company called SkinBiotherapeutics (SBTX) (Equally overvalued incidentally!!). Without this then cash in the bank at the end of November would have virtually been zero given that they report they had £687,699 on the balance sheet. Worryingly they appear to be relying on more share sales of SBTX to raise cash. They say :- "We have the option to further reduce our holding (circa £7m) in SkinBioTherapeutics plc if growth capital is required. " Really? A buyer already lined up? What if nobody is interested? Do they realise share prices go down? In fact SBTX is down a further 6% today.

2) They also say this:-

 "The 12 months to 30 November 2019 have seen the transition of the Company from a research and development business to a company building commercial revenues" . 

If you check back then you'll see they've been using this same line for three years now. It appears to be a very long and very slow process.

3) "In line with previous years, the majority of income was generated in the second half of the year (H1 2019: £148,818). We expect this trend to continue in 2020"

So that'll be "sod all" revenues in the first half of 2020 then?

4) I notice that the aim for profitability has now been set for the end of 2020 with the caveat of no guarantees. It would be helpful to know what losses were incurred this year and then perhaps we can come to our own conclusions about the likelihood of profitability in 2020. My guess is not very likely.

5) Finally a ridiculous idea of exploring a listing on the NASDAQ in the same breath as saying they are trying to manage costs. Laughable. Anyone would think the CEO is trying to pump up the share price on crap results? Surely not?

The rest of the trading statement is the same old verbose puff and bluster that has been spouted out numerous times before.

If OptiBiotix was valued at around £7m-£10m then it may be worth re-examining as a speculative punt but at over £40m it's hugely overvalued.

As ever, AIMHO.