By Cynical Bear | Monday 9 January 2017
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Anyone who read my sell article HERE and took the brave option of selling pre-final results would have made an instant profit but, to be fair, you wouldn’t have had long as the year-end results came out on 29 December, about an hour after my piece was published. An additional trading update came out this morning though - is that a light at the end of the tunnel I see?
First, let’s look at the year-end results which were worse than I had expected. The business is awash with debt and actually had net liabilities as at 30 June 2016 of over £6 million!
There were three new pieces of information though, one arguably positive and two less so.
It now has the option of deferring the interest on £10 million of its £11.1 million debt to 2020 and the note holders can take the interest in equity if they so wish which will help cash flow. This is critical because of the other less favourable news.
The Respin JV in the US has been costly to-date although there could be something of inherent value there; however, Nektan’s JV partner, Spin Games, appears to have given up the ghost to a certain extent and Nektan had to fund more of the losses in 2016 than it originally planned, so much so, that now it is an 85% subsidiary of Nektan and there will be additional costs to cover in 2017.
Finally, a real body blow.
It transpires that the marketing JV agreement with the Betfred owners (and others) relating to Nektan Marketing Services contains a put option enabling the partners to sell their 50% stake to Nektan as early as October 2017 for an estimated £4 million.
Why the valuation of the business for the purposes of the option is based on revenues is hard to fathom but, in short, I don’t think Nektan has the best of that deal and it hardly bears saying that it doesn’t have £4 million in the bank.
Obviously, the JV partners may not exercise that put option but, if I was in their shoes, I would be making a claim for that money as quickly as possible while the business is still going!
Looking at the positives, it did manage to raise £2.3 million (gross) at 27p with an open offer for a further £500,000 to keep going for the time being, but clearly stated that more funds are required and the placing pricing adjusts downwards should funds be raised at a lower share price.
In addition, it put out a positive trading statement this morning, with very strong growth in Net Gaming Revenue (“NGR”) continuing into Q2, up to £3.6 million. It would be churlish of me to not admit that this is encouraging and I wonder whether it could this be the start of the turn-around.
It is difficult to tell for now as there is limited information in the update and one must remember that Nektan is merely the platform provider and no longer has any of its own brands, so it only takes a revenue share out of this NGR balance after various deductions. Accordingly, for me, the important number is the gross profit after partner fees, marketing and affiliate costs, and if this moves into positive territory, Nektan can start making inroads into its admin costs and give it the chance to repay its debts.
With any light at the end of the tunnel, one can never quite tell at an early stage whether it is a bright new dawn or a fast approaching train and with limited information on underlying profitability or cash flow here, I am not going to change my stance just yet, as the balance sheet remains unsustainably stretched with more cash required later in the year although I do applaud the underlying growth.
I will be able to give a proper assessment once the interims come out by the end of March when one will be able to get a better view of the underlying profitability and the long term future.
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