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.