By Tom Winnifrith, The Sheriff of AIM | Friday 3 March 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.
This morning, after a series of profits warnings, AIM uber dog TrakM8 (TRAK) has announced that there is a bookbuild underway on a £1.66 million bailout placing at just 65p. The shares are now 67p bid so you'd be a moron to participate but conversations are being had between institutional morons and hapless broker FinnCap right now, not withstanding the fact that today's statement lays bare the Nov 28 interim statement as 100% misleading.
When I first started investigated this POS my thesis was summarised as this:
"profits are a matter of opinion cash is a matter of fact. TrakM8 has never generated material cash even when reporting material profits. It has oft burned cash. It is a piss poor business. It has masked this by doing paper & debt funded deals to buy crap companies such as RouteMonkey with debtor books it could squeeze to bring in cash. But you cannot spin plates forever."
And lo it has come to pass. The debt and paper funded deals TrakM8 made were meant to boost sales, profits and earnings. That is what broker FinnCap told us in its research notes. They did not. But squeezing debtor books which were part fact/part fiction did generate some cash.
At the time my analysis persuaded some wise souls to sell. As the shares slid others described that as a "winniwobble" and bought more. They were wrong. The analysis was bang on the money hence today's bailout. The placing is half done already as directors have pledged to put in £811,000. Here is how that conversation went:
FinnCap Broker: What the fuck! You need a placing to bail you out? As I said to that stripper at Browns last night: Fuck me! After all those profits warnings and with Tom Winnifrith 100% vindicated that is a bit of an ask. You are avin a bubble. This makes our research from Lorne Daniel look even more offside. He is a good chap, unlike we bounders in FinnCap corporate, broking and he will be livid. I can't see him being prepared to write any more buy notes.
John Watkins of TrakM8: Look if we do not get this cash we might breach bank covenants. You will get 5% commission. 5% of £1.66 million is £66,000 - that pays for a lot of coke and hookers and polo club subscriptions. What about it?
Finncap. Comprende compadre. But look, no-one will be mad enough to back this unless we spoof them. You guys made a seven figure killing when you flogged shares to "satisfy institutional demand" at 157.5p. Boy that was a good spoof was it not? How about you reinvest a fraction of your winnings now?
John Watkins: Do I have to? I own enough of these shares already and we all know TrakM8 is a crap company.
FinnCap: Do you want the money?
John Watkins: Oh alright then. How about we directors reinvest £811,000 of our winnings - will that spoof the fund managers?
FinnCap: That will do nicely. We will now tell the Fund Managers that unless they spunk £855,000 of other people's money on this placing then TrakM8 will be in real shit and they will look daft as brush on their existing investments - like that "oversubscribed placing at 333p in November 2015 to buy the joke RouteMonkey outfit. That won't help them at bonus time as their utter lack of due diligence becomes clear.
John Watkins: So you will underwrite this placing?
FinnCap: Sound of laughter. Phone goes dead.
And so that is how, my friends, TrakM8 will get bailed out. But will that new cash turn a turd into a gem? No.
We are assured that TrakM8 retains "the full support of its bank". When a company feels the need to say this you know it is in trouble. It means that the Bank is now monitoring for covenant breaches on a daily basis and has urged TrakM8 to raise fresh equity as it is teetering on the point of default. It is a massive red flag.
Net debt as at 31 January stood at £6.2 million - a minor detail omitted from the 21 February profits warning, a glaring omission we flagged up at the time. As at 30 September net debt was just £4.4 million. So we now know that cashburn in the second half of the year has been running at a stonking £450,000 pcm. Whaddya reckon net debt is now? Why not give us the 28 February number? Are management accounting systems that shite that TrakM8 cannot do it or is it hiding something?
I suggest that raising £1.55 million net will ease the pain but with February cash burn will still leave net debt at £5.1 million and rising. There is a very real danger that the company will still breach its banking covenants later in the year.
I remind you that at the half year total debt was in fact £5,843 million so one would assume that, ceteris paribus, total debt post placing will in fact be £6.543 million and rising. The company has a £5 million term loan facility and a £5 million RCF facility ( a corporate overdraft repayable on demand). As it eats more into its overdraft ( which is repayable in full) in December 2018 the bank will remain jittery.
TNAV at the half year ( 30 September) was sub £1 million. Given the cashburn since it was almost certianly LESS THAN NOTHING pre placing. If I were the bank Id call in the RCF as soon as the placing monies arrive and then force TrakM8 to sell its assets to clear the term loan.
The bank may be more generous but this company is living on borrowed time while it continues to spunk cash and with its balance sheet such a mess.
By the way does anyone - even crony capitalist PR man Reg Hoare - now believe a word TrakM8 says. On 28 November it stated
"In any event, Trakm8 has historically been more cash generative in its second half and we expect this characteristic to be repeated this year given the pronounced second half weighting of revenues and profitability we expect ....With our largest ever pipeline of substantial new contracts in place as a result of increased sales and marketing activity, international expansion and the contract win announced today with Smart Drivers Club, we have good visibility to support our growth aspirations."
With hindsight that was complete and utter bollocks was it not?
I remind you, net debt was £4.4 million at 30 September. It was £6.2 million by January 31. I put it to you that - given the bollocks RNS of 28 November) either TrakM8 has among the worst management accounting systems on AIM - surely it knew that net debt has increased since 30 Sept - in which case its FD James Hedges should be fired at once or that RNS (interim results) was grossly misleading. Come on Reg which is it? Is your client monumentally incompetent or just a brazen liar?
There is another matter. After the 21 February profits warning John Watkins bought shares in the market. Did he know there was a bailout placing looming? Did he know what cash crisis TrakM8 faced? Was this just a spoof from his winnings to support the share price ahead of the placing? That share trade stinks to high heaven.
Do not take part in this placing. TrakM8 could still go bust this year. The stock is uninvestable crap and my target price is now slashed to 25p
PS Given my awesome coverage see HERE over a long time, certain folks should be sending me a case of ouzo today. I have emailed my address to LD, PS & RH and hope they crack on with it as I am off to Shipston tomorrow and the bottle I bought for my father will again be depleted today. It is clearly ouzo o'clock already.
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