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Tern – FY15 Results part 1, where does the added value come from?

By Nigel Somerville, the Deputy Sheriff of AIM | Saturday 30 January 2016

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.

AIM-listed investment company Tern plc (TERN) released its results for calendar year 2015 this week. ShareProphets has been  taking an interest in the AIM investment company world so it seems a good time to take a look at what Tern had to say in its RNS….and what was saved for the Annual Report only. In this part we look at the increase in net assets and where the added value came from.

The first thing worth commenting on is the speed with which Tern got its numbers out. There are plenty of tiddlers in the AIM goldfish bowl which take the full six months allowed – for no obviously good reason other than to delay bad news for as long as possible. Readers will be aware that I hardly regard Tern plc as a paragon of virtue but it should be congratulated on getting its numbers out just 26 days after the year end. Of course, it is hardly a complicated business but even so a 26-day turnaround is a good effort – and even faster than last year’s 41 days.

There was plenty to talk about in the 2014 numbers – not least of which was the stated NAV per share of around 2p (as against the then market price which traded between about 5p and 7p a share). That didn’t sound like great value to my mind – especially if one took into account a series of convertible loans with a conversion price of between 1.25p and 2.016p.

So what are the new numbers? Well we are told the net assets of the company are £1,691,881 but I don’t see a NAV per share figure in this year’s results RNS. Why might that be?

Let’s do some maths: all we need is the number of shares in issue. Hmmm…I can’t find that in the results RNS either – although we do get a weighted average number of 49,375,127. That implies a NAV per share of 3.4p but does that answer the question correctly?

Er…no. On 29 December 2015 there is an issue of equity RNS which states the resulting share capital as being 62,755,569. Well that’s a bit different, and brings in NAV per share at 2.7p. Against a share price which closed last week at 13.875p there would appear to be an incredible amount hope in the share price.

Last year’s stated NAV per share came in at 2.09p so we’ve had quite an uplift of about 29%. But has that come from the added value brought to Tern’s investment portfolio by its talented management team?

Somehow I doubt it - it rather appears to me that it has simply come from issuing confetti at (on average) a huge premium to the previous NAV per share. Let’s do the maths…for which we need numbers from Note 13 to the Annual Report (HERE).

We have the exercise of 354,355 warrants at 3p and a placing of 6 million shares at 12p, balanced off by 588,640 warrants converted at 0.02p as well as the conversion of loans into 9.84 million shares at 1.25p and a further 744,047 at 2.016p. That comes to a total of 17,527,042 new shares for £880,403 – an average issue price of 5p.

If we strip out the effect of the share issues by subtracting the £880,304 from the stated NAV and the 17,527,042 shares from the issued capital at year-end we see 45,228,527 shares and £811,577 of net assets which works out at 1.79p per share – a drop from the quoted 2.09p as at FY14 of 14%.

It is, perhaps, a bit of a simplistic was of doing it but it seems to me that the only reason the NAV per share has increased is because the company has issued shares at (on average) a higher price than the previous NAV per share.

With the shares having peaked at about 28p during the year and now down to 13.875p one wonders how much longer the company can go on raising money to push up its stated NAV.

Might that be a Red Flag? What if the market takes a turn for the worse?

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