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On Tuesday 2nd February I dragged my sorry Butt up to Islington for the Shares Magazine / Cenkos ‘Innovators and Investors’ Conference which is something they have been running for several years now. I find it is quite a limited event in that there are not all that many Companies attending but in a way that is a good thing as it is easy to whittle down the ones I want to speak to and I can focus my efforts on them. A big danger in Investing arises from the classic ‘Too much choice’ problem.
Sadly for me, many of the Companies are too small for my criteria and there is always a lot of ‘Blue Sky’ ‘Story Stock’ type of Very High Risk situations (in other words if you put money in a lot of this stuff you will almost 99% guaranteed lose money). So the trick is to spend a bit of time beforehand (it really doesn’t take long) to draw up a short list of the Stocks you are interested in and if you can spend a bit more time, you can even do an initial poke around them and come up with some focused questions that you would like answers to.
A few of the Companies I spoke to were because I either own them or I am interested in them as Potential Investments - the others were ones where friends had asked me to have a look at them and give my thoughts.
In addition to the serious business of talking to the Companies, I also met up with some old buddies and some newer mates from Twitter etc. and it was a fun social event. That’s another good reason to only speak to a few Companies - you need to leave plenty of time to gossip with mates about the Markets and all the usual stuff. Another advantage is that we were able to gang up on a few Companies and it’s very helpful because a lot of questions and clarifications feed off one another’s inputs.
Here are my thoughts on the Companies I spoke to:
Quantum Pharma QP.
This was the Number 1 for me to talk to. If I failed to get around to any other Companies because I was too busy troffing Cake and knocking back the Americanos (“Blue Jeans and Chinos?”) and gassing, then it was critical I spoke to QP. because I hold them and am seriously thinking of buying a lot more at some point.
I bought into QP. a couple of months back and needless to say they then did a Profit Warning within a very short space of time !! Typical. Luckily I had followed my usual approach of only putting about 2% of my Portfolio Exposure into them and because they failed to move up straight away, I did not top them up. Anyway, in essence the problem arose because they had promised to the Market that they would get something like 10 Products through Regulatory Approval this year but in reality they will only manage 2 - this caused a big drop in the Share Price.
You can find the extensive Blog I did on QP. Here (note the Numbers will have changed due to the Profit Warning):
Therefore my main focus was to understand this Profit Warning and to figure out what the Directors were really doing to resolve the Issues and to look them in the eyes and see how credible and serious they are. In addition, it is clear to me that they are a young Management Team and I wanted to understand if my expectations of them to grow QP. into a much larger business over the next 5 or so years is realistic.
Our gang pounced on the Chief Financial Officer, Martin Such, and obviously we started with the Profit Warning question. In essence, QP. are taking Treatments that used to be ‘Specials’ (one off Drugs that have in the past been made up at the pharmacy - they might be special doses or formulations or something that is non-standard) and standardising them as Approved Treatments that then have in effect a ‘Moat’ created from the Regulatory Framework. It looks like the Directors didn’t really have a grip on the Processes involved in getting these Treatments through the Approval Regime and the time required was completely underestimated. This is obviously a Project Management exercise and it is a common failing in many Businesses for this kind of thing to go horribly wrong.
Anyway, the upshot is that QP. have reorganised how they manage the Development Pipeline and appointed Nicola Massey (who previously worked at Shire SHP) as Managing Director of Niche Pharmaceuticals. You can read her resume here:
She looks like a no-nonsense Boss to me !!
It is pretty clear to me also that there was a problem of over-promising with regard to the intention to get 10 Treatments approved this year - probably part of the IPO process and egged on by the Brokers, Zeus Capital (note, QP. are looking for a second Corporate Broker - this should mean more promotion of the Company and increasing Investor awareness). I really nailed the CFO on this issue and it was clear to me that he was very embarrassed and irked about how this had come about - I think to a large extent it was naiveté (is that how you spell it? What’s that funny thing over the ’e’?) and lack of experience in dealing with the City and all its foibles. These are very young guys and it is pretty obvious they will not have dealt with the City much before (this is a good thing in my eyes which I will come on to in a bit).
Anyway, the facts as I see them are that they screwed up and they know it and they have put in place Operational Changes to sort out the Project Management and the CFO will be much more conservative in future. For me this is good - see the example of Next NXT who have for many years under-promised and over-delivered (also Tristel TSTL are good at this).
The current forecast is to bring 5 Products through the Approvals Process in the remainder of FY 2016 (end 31st Jan 2016) and to bring another 5 through Approvals for FY 2017. In addition to these, they have another 60 to take through Approvals - I am not sure what the time table is on these.
In recent years the number of Specials provided by Pharmacies has been falling - this is mainly put down to financial pressures within the NHS and Doctors prescribing Specials less and Pharmacies less keen to do them as they mean time and hassle. I asked the CFO about this and he said that the current level has been stabilising and that the move to getting many of the Treatments Approved will make it easier for Pharmacies etc. to provide these Treatments. He also pointed out that the Demographic make up of the UK dictated that the declines have a limit.
Reason for the IPO
It is pretty obvious that this is a very young team of Directors and I see this as a huge positive. Andrew Scaife, the CEO, joined the Company in 2009 as part of a Management Buy Out which was backed by Private Equity. The CFO made the quip that “Private Equity was more like Private Debt” and that being part of a Private Equity empire was a huge constraint on their growth plans and strategy. The IPO freed up the Company and provided funds to chop the debt - this makes total sense to me. I get a strong impression that these guys know they have an opportunity to create a Big Business here and are very much focussed on Growth - exactly what I want to see as a Shareholder.
The recent Acquisition of Lamda (based in Greece) gives QP. a route into Germany and potentially other European Territories - I don’t see this as necessarily where the growth will come from but it is a potential bonus.
The CFO was very keen to show us the Biodose medications dispensing tray thing. It’s clearly pretty clever and has potential but to be honest I can’t get over excited by it - I think Acquisitions are where QP. growth will really come from, not from particular Products. Biodose is a sort of tray that people will use to help manage what Medications they take and when. The tray has 4 ‘slots’ for each day and the Patient pops them out when needed and there is an electronic sensor which tells whoever wants to know that the Drug is being taken. There is clearly a lot that can be done around here with things like automatic reordering (it does not do this yet) and link to a Fone App and suchlike. The beauty is that this tray thing can do liquids as well as solids. The CFO did mention that they had spent £2m developing it - I hope not cos that sounds a huge amount - I got distracted and didn’t question him further on that. I get the impression that at these Shows they use Biodose as something amazing that Punters can touch because in all frankness the rest of QP.’s business is as boring as hell…….(that is a good thing by the way !!).
One of my mates felt that QP. were missing a trick with Biodose and that it would generate huge amounts of data that could be used in many creative ways.
The CFO mentioned that they had a lot of hopes for the Mucodis Product Range and that this would be good for them. This is a treatment for Patients undergoing Chemotherapy and helps relieve side-effects of ulcers and stuff.
Overall I came away from my chat with QP. very happy and I expect to be buying more Shares in the future - but I will wait until the Shares start to show Upwards momentum again and I will probably wait for another Trading Update to make sure they have got a grip. Long term I think this is a cracker and I pick up a 2.4% Dividend from a pretty stable and predictable business while I wait. The Key for me here is the young and dynamic Team of Directors who clearly know that this is their opportunity to achieve really great things and to enrich themselves (I don’t mind them enriching me a bit more in the process). It is worth considering what they have achieved already in creating a sizeable business within about 6 years or so.
ShareScope has forecast EPS next year of 6.5p which gives a Forward P/E of 11.4 at today’s closing price of 74p. It also has a 2.4% Dividend Yield expected. This seems reasonable value for what is very much a Growth Stock.
The Downtrend here is clear - to be safe, I would not really want to topup until we break to an Uptrend - probably need the Price up over 100p to be confident it’s on the mend. If they do a good enough Trading Update, I might be tempted in earlier.
This is another Stock I hold and I have done for many years. They produce software for Commodities Trading and have a specific Recycling Product which is clearly very good. It’s no huge surprise that the problems in the Commodities Sector have finally caught up with BRY and they put out a Profit Warning a few months ago which didn’t go down too well. I won’t dwell on this - Readers can dig into it themselves.
The historical view put out by the Management Team was that even if the Price of Commodities themselves fell, then Traders would still be Buying and Selling Contracts and it would make little difference to BRY. This sort of sounded plausible but the reality is that Traders are having their margins squeezed and this is hitting their Capital Spending and obviously knocks-on to Suppliers like BRY. In addition, big Trading Houses like Glencore GLEN are suffering in their Mining arms and this is not helping the situation.
We spoke to the CEO Gavin Lavelle and the CFO Martin Thorneycroft and their lovely Marketing boss who tried to poison me with ‘Sugar Free’ Mints that were full of Sugar (fresh in from China, no less). I have spoken to these guys many times before and we always have a good laugh - I have to say full respect to them for actually coming to the Conference because they must have known they would get a good kicking from many disappointed Private Punters. I didn’t bother beating them up - they know they have had a tough time and it achieves nothing me rubbing it in. They were very open and frank with us and gave me the impression that they had reduced Costs in order to meet Expectations but it was clear the body language was somewhat subdued compared to the times I have met them in the past. They also seemed a bit tired - guys, if you are reading this, try to take some time out and recharge your batteries !!
I came away with the distinct impression that times are tough at BRY and I expect this will be the case for some time to come. BRY has a sizeable Cash Pile which should give some support to the Dividend for a while - I am happy to hold the Shares, but I will not be buying more - yet. It is a small probability but there is a chance they could get bought out while their Share Price is depressed. In addition, Gavin said they expect many distressed competitors and might be able to pick up some great Acquisitions themselves. I do not have all that much direct Resources exposure so I am happy to play the Sector via this ‘Picks & Shovels’ Stock.
ShareScope has forecast EPS for next year (ending Dec 2016) of 3.1p. On the current Share Price of 57p this gives a Forward P/E of 18.4 which is not particularly cheap. However, it must be considered that this could be ‘bottom of the cycle’ earnings and going forwards the EPS might bounce back - especially if they do some decent Acquisitions. In addition, they had £6.5m of Cash at the end of December 2015 and if you strip this out the Forward P/E falls to about 16.
There is a Forward Dividend Yield of 3.65% which should be reasonably safe with the Cash Pile - however of course this is all dependent on how the Commodities Sector does over 2016.
With the Profits Warning BRY has clearly fallen out of its Long Term Uptrend. However, it is clearly more ‘Low’ than ‘High’……….
I have known about ECK for many years and often looked at it quickly but come to the conclusion it was fully priced. In addition, I used to hold Netcall NET which is very similar so I saw no point in owning both of them.
That passing mention to NET is pretty relevant here because ECK tried to buy them some months back but a Major Shareholder in NET was having none of it - incidentally, NET might be worth a look.
We spoke with Adam Winterflood who is the Operations Director and I think he said he had been at ECK for about a year but has a background in Telecoms and has been involved in raising Funds for New Business Ventures in the past. He was an amiable chap and we had a good laugh - I like this because when you can get Directors in this kind of mood they tend to let more slip out. If you go in with an antagonistic manner they will clam up and you will learn nothing. It’s human nature.
ECK Core Business is Call Centre stuff like IVR (Interactive Voice Response) and ACD (Automated Call Distribution) kind of stuff - they are clearly very good at this and well established. I think it is about 70% of their Revenues. The other bit is newer and is around Secure Payment Solutions for Call Centres. In the past, Call Centre Staff have taken people’s Credit Card details and keyed them into the Customer Relationship Management (CRM) system but of course this is extremely insecure - Adam mentioned that TalkTalk had had recent problems around such Data Security Breaches - you probably saw this on the TV.
ECK Secure Payments means that Customers key their Card data into their phone Keypad and the Call Centre Operator just sees ‘******’ appear on their Screens - all of the Payments handling takes place in a separate System and a ‘Token’ is produced which is like a Secure Data Packet that is then re-used in future when the Customer calls up again etc.
Adam said something very interesting about the Call Centre industry. I was under the impression that the number of Humans in Call Centres would be falling as Computers took over but this is apparently not the case - in fact, it looks like Human numbers are increasing slowly but the big change is that Humans are doing higher value tasks like Up-Selling and Advice kind of work. Call Centres can be soulless places to work (I have worked in such a Cube-Farm) and giving the Staff more important roles can only be a good thing.
Adam spoke a lot about the recent Acquisition PSS in the US - this gives them openings over the pond and was clearly a growth driver for the future. I came away very impressed with what I had seen and heard and I think ECK could be a good play for the future - I like the strategy of steady growth with Bolt-on Acquisitions and clearly they have done well for many years.
ShareScope has EPS of 1.65p for Next Year, March 2017. On today’s Share Price of 44p this gives a Forward P/E of 26.6 - that is not cheap. This would put me off investing - if I was serious, I would need to dig into the Forecasts and try to understand just how strong the growth is and whether or not this can continue. There is some Cash but not much. It has a Forward Dividend Yield of 1.13% which is pretty paltry.
It’s certainly a nice Uptrend.
@BenSharman on Tweeterer asked me to speak to KMK and give him my thoughts. We approached the Stand and spoke to an engaging chap called Jerel Whittingham (I think) who is a Non-exec but has been involved for some time and knows the business very well.
We asked him to give us the full spiel on what KMK is and does and he went through the Products with particular emphasis on the Portable Radiation Detectors for picking up sniffs of a ‘Dirty Bomb’ where a Terrorist nutjob blows up Radiation emitting material (apparently loads of such material has gone missing from hospitals all over the War Zones in Syria, Iraq, etc.) with a normal explosive and the Fallout causes lots of Radiation Poisoning.
This is a big fear for Major Cities and the US DERPA Agency (I have no idea what this stands for but they do research into defence and security type stuff) put out a Tender for portable Radiation Detection devices which can be worn by Police Officers, Ambulance Crew, Firemen, Government Workers etc. and a network of detectors is created. These things can detect up to a fairly limited distance so you need a lot of them but by spreading them out across a City the Powers that Be can monitor them and where they detect a sniff of Radiation they can deploy more people with detectors onto the scene to establish the source.
Anyway, long story short, KMK beat off the other 2 competitors and won the contract to supply the kit and I think they are something like $400 each. Arnab Basu, the CEO, mentioned that there was potential for 12,000 or something. The devices are about the size of a smartfone (a proper one, not any of that Apple rubbish) and maybe 3 times as thick. It was quite heavy but a Police Officer would wear it sort of on the shoulder like they do with Radios and stuff (incidentally, it did strike me that there were similarities to Sepura SEPU here but KMK are a long, long way behind the Financial Success that SEPU have had.)
The NED then told us about the Medical Scanner stuff but I didn’t take a lot of notice and to be honest I felt that the real story here was all about them Radiation Detectors for DARPA. The Medical stuff is clearly more legacy.
After the Show, Arnab Basu emailed me, which was very good of him, and sent me a link to a YouTube Video where DARPA talk about the Radiation Detectors:
According to ShareScope KMK is forecast to Lose £3.84m and then £3.75m over the next 2 years - so this is nearly £8m which needs to come from somewhere. I notice they did a Placing for £10m recently but this doesn’t leave much wiggle room - if they fail to get to Breakeven after the next 2 years or if they overspend during these years, then another Placing will be needed or maybe by that stage they could take on Debt to cover the gap. Anyone investing here will need to really understand this situation on the numbers - for me it is too High Risk at the moment but I can see this being a belter in a couple of Years when we are in a better position to judge the Valuation side of things.
There really is a lot to like here in terms of the potential for the DARPA Radiation Detectors but for me it is just too early stage and with a Market Cap of £47m it is arguably overvalued. For Next Year ShareScope has Forecast Revenues of about £9m - if you value this on a Sales Multiple, then maybe you could justify 3 times Sales which would be around £30m.
Now all this needs watching closely - if KMK get more advanced Orders from DARPA and the Revenues upfront to some extent, then the need for more Funding will go away and obviously the Company could be worth a lot more than the Numbers I suggest - for people who like a Punt, this could be very good - but I cannot stress too much how Risky this is.
Not a great Chart. The earliest time to buy would probably be if the Price can Breakout from that Black Downtrend Line I have marked with the Black Arrow.
XL Media XLM
I spoke to XLM last year at the Show and I do like them a lot. I did a bit of a flying visit as I know a lot about them anyway. In essence, the ‘Strategic Review’ is being undertaken as the Directors are of the view that the Market is just not giving them the correct value - and I agree. I have not bought XLM before (although I have said many times on Tweets that it looks too cheap) because I hold Netplay NPT and 32Red TTR which are both in the Online Gambling space. However, when I mentioned this to the XLM Lady, she said that gambling was now only 60% of XLM.
She also said that the Strategic Review could result in XLM being taken over or XLM doing a takeover, or a divestment or some other variation - in other words she gave nothing away.
I also asked her about the Adverting Business with particular nods to Ad Blockers - she said it is having very little effect on them because XLM adverts are more subtle and when they purchase Advertising Space they do not buy Pop-Ups and intrusive stuff. In addition, and importantly, most of XLM business is about Informative and Educational Gambling Websites which route self-selecting Punters to 3rd Party Gambling providers. It is not about mass advertising gash.
ShareScope has Forecast EPS for Next Year (Dec 2016) of 7.92p. On today’s Price of 72p this gives a Forward P/E Ratio of 9.1 - this is Cheap.
However, they also have a Cash Pile (I am not sure of the correct Cash figure - at Interims they had $12m but seem to have done a couple of Acquisitions, so this needs to be carefully checked) so the true P/E is arguably lower and the growth is very fast here. There is also an expected Dividend of 5.3% for Next Year - that is a decent. With a possible Takeover as well, this looks very good value to me. The undervaluation probably arises from them being Israel based and also the fears over Ad Blockers - it is also a fairly recent IPO so could be off the radar as well.
Looks decent enough.
In the past I have ignored these because it looks stuffed with Debt. However, I am a bit interested because Gary and Greg Mesch are involved in it and I know of these guys from my IT Telecoms Sales days when they set up ESAT, Versatel and Libertel - they are very shrewd guys. I can’t remember which one, but one of them is totally involved in CFHL and this must make it interesting.
However, the bloke I spoke to was very non-committal and unhelpful really - I was not impressed. He muttered something about £7m of EBITDA in a year or so I think but can’t say that impressed me either. It was all a bit cr*p really - there might be something here in a few years but with that kind of attitude I can hardly say I am all that bothered to find out. To be fair, maybe he had had a long and tiring day because it can’t be much fun on those Stands.
CFHL is forecast to lose £25m over the next 3 years according to ShareScope. It has a Market Cap of £151m. Is this a joke?
Nothing special really.
The only Presentation I saw was from RENE and this was because @SteveAdams007 had asked me to take a look at them. Sadly they did not have a Stand and by sheer luck I asked the right person at the right time and we just had to wait 15 mins or so and RENE were doing a presentation.
The Presentation went well and the bloke told us all about Stem Cell treatments and something about Eye Disease which they are working on and also a Stem Cell treatment for bad circulation in limbs - like is caused by Diabetes. Clearly they have Treatments in Clinical Trials but he said it would be by the end of 2017 for the Eye one I think - he called it “swift” but that does not sound over zippy to me.
I did catch something about a Market Cap of £92m and a Cash Pile of £70m - if this is right, then it seems like they are quite well funded to carry on their Studies but of course in any early stage thing like this you have to watch the Cash Burn because if they do a Placing you get diluted.
In terms of the Products and the potential there is clearly a lot to like but this is very much a ‘Story Stock’ and Very High Risk. This kind of thing is for Experts only I think and you must only put a small part of your Portfolio in this sort of Stock. If you have a big enough Pot, then maybe you could put 10% in such High Risk stuff and have maybe 10 ‘Investments’ across these kind of things - the theory is that 1 or 2 are huge multi-baggers and the rest go bust - easier said than done I find.
The other approach is to be more of a ‘Trader’ than a Long Term Investor in these kind of Stocks. You buy them when there is no news and the Price has dropped back and you sell them when they Spike up on Hot News or if they are Tipped by Shares Magazine or something.
According to ShareScope, RENE is forecast to lose nearly £50m over the next 3 years - obviously they have the Cash to cover this but there is clearly Risk around Funding if they overspend or if Losses continue after 3 years.
Pretty much been in a Sideways Range for 6 Years.
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