By Tom Winnifrith | Friday 12 October 2012
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.
On 21st September I wrote: Theatrical agency Reach4Entertainment (R4E) has been one of my worst tips ever. 81p in 2007 – when the company was called First Artist has become 3.5p today. My former colleagues at a site I shall not mention decided to shoot the dog after interims on 12th September. Unlike them I have spoken to chairman David Stoller and I think they are wrong. News out today very much starts to vindicate the writer who could be bothered to speak to the company and having had a quick pizza again with Stoller 10 days ago I am more convinced than ever ( with the shares now at 4.75p) that this may be a speculative buy. Here’s why.
To anyone who sold at 3p or below thanks to the advice from a site I do not mention I am sorry. The lack of a company phone call was poor research and you know who to blame. And it is not me.
Today we get news from Reach that it has:
raised GBP 0.35 million net of expenses by the issue of 7,805,000 new ordinary shares (the "Placing Shares") at a price of 4.5 pence per share (the "Placing"). The proceeds of the Placing will be used to fund general working capital requirements. The Directors of the Company have indicated that they would have liked to participate in the Placing but were deemed to be in a Close Period by their participation in ongoing discussions with the vendor of Spot and Company of Manhattan Inc ("SpotCo") to renegotiate the settlement of the final earn out payment. It is the intention of certain Directors, to subscribe for new ordinary shares at the prevailing mid-market price but not less than the Placing price, as soon as these discussions conclude. David Stoller, Executive Chairman, r4e, said, "I am delighted with the interest and support that r4e has received from existing shareholders. In particular I am pleased that the Placing was led by strong institutional interest, underscoring the positive achievements and developing opportunities that we highlighted in our recent interim results".
I noted on the 21st that Reach faces two hurdles.
Firstly, it needs to renegotiate the final SpotCo deferred consideration. Secondly it needs to ensure that its banks are happy with its ongoing debt needs. Today’s statement makes it pretty clear that the board reckon they are close on the first. My chat with Stoller makes me think they are almost there on the second matter too.
There could be a last minute glitch on either in which case it is game over. But the odds are shifting the way of Reach. If there are no hitches you have a business which will have debt of c£14.3 million but which is very profitable. How profitable? There are no broker forecasts and so the numbers below are my stab in the dark. But long chats with Stoller make me feel fairly happy with them I flag that there are three variables where I cannot be sure on timing. Firstly PLC costs have been slashed since the involuntary departure of former CEO Jeremy Barbera. Stoller clearly regrets bringing him in. Those savings will total close to a million but will not really come through in full until calendar 2013. Secondly, the core Dewynters business is trading well in London, SpotCo fairly well in NY. This year’s numbers will be second half weighted. And finally there are a number of new organic initiatives from Stoller are starting to kick in but will not really make an impact until calendar 2013.
So, I forecast a calendar 2012 EBITDA of £1.5 million with interest costs of £650,000). In 2013 I would be looking for £3-4 million. This is nothing like the level Barbera used to promise but it is still a decent enough showing. And at that stage Reach can start to pay down its debt. What is the stock worth on this upside scenario? It is hard to say as there are no comparator stocks but on an EV/EBITDA multiple of 8 times bottom of the range 2013 forecasts we get a valuation of £24 million. Knock off the debt ( I assume some paydown in 2013) and you arrive at a value of £12 million or 16.2p a share (on the basis of the new issued share capital – it may be a tad lower after directors sign up in a placing). You should also knock off the SpotCo defcon (assuming it is delayed or paid in equity) and that reduced the number to 14.7p per share.
This remains a binary bet. Bad news on SpotCo or the banks and you lose pretty much most of 4.75p. Good news on both and you gain 10p. The odds on the latter outcome seem to have got a lot better on today’s news. I certainly would not sell and there is a growing case for a small average down speculative punt.
Libertarian investment writer Tom Winnifrith offers a premium share tipping service at www.t1ps.com but also writes extensively for a number of US and UK financial websites. All of that material ( bar the t1ps content) appears on his own blog, which also carries his extensive original non financial material, at TomWinnifrith.com – for alerts on all Tom’s writings follow him on twitter at @tomwinnifrith
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