By Cynical Bear | Wednesday 28 December 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.
Challenger Acquisitions (CHAL) has a been a common target for me this year and it doesn’t surprise me that its share price has collapsed from 37.5p when I first wrote on the subject back in January to 11.875p today – a drop of 68%. However, I think there’s plenty more to go and would actually be surprised if it still existed by this time next year.
I won’t go over too much old ground from my previous articles that can all be seen HERE but, in summary, it is coming under increasing pressure from the debts on its balance sheet and there is still no sign of any new Giant Observation Wheel contracts; the only one that has ever been mentioned since IPO was Jakarta, the original MOU for which was signed in mid-2015 and still the funding has not been obtained. The oft-quoted phrase of Mark Gustafson, CEO, that Challenger will start work on one new wheel a year looks far-fetched as it hasn’t actually started one since coming to the market in February 2015.
The short-term financial pressure is coming from a number of areas.
First, it has to pay its bills. I’ve estimated that its monthly costs are approximately £250,000 and although there may be limited funds coming in from the New York Wheel, I doubt it will be covering those costs.
Secondly, it has impending payments to the ex-Starneth vendors. These payments have already been extended once and now €625,000 is due in January, the same amount in April and then a further €1.25 million in July. It may be that the vendors will be willing to postpone again but at some point they could just get fed up and leave, particularly if their wages aren’t being paid either.
Third, a significant chunk of the convertible loan notes that have largely been used to fund the business to date are coming up for payment shortly. By my calculations, there is about £2.6 million due for repayment by mid-May, although, like last year, these could be extended again.
I’m of the view though that it will be much harder for Challenger to amend and/or extend the terms for the ex-Starneth vendor debt and the convertibles as the business is now a further year on without progress. There has been a notable lack of news or even interviews on unregulated sites from Mark Gustafson and one can see from the last funding round at which Challenger only raised £250,000 with the promise of a further £100,000 that it is proving tougher to find funds.
There is always the slim chance of Challenger announcing a mega-contract that could sort all these financial difficulties in one fell swoop…..but personally I think that is unlikely.
As I have touched on previously, very few of these Giant Observations Wheels have proved to be a success, the London Eye being the only obvious success story and most cities given a choice between spending £100 million on something, or a staggering $600 million in New York’s case, or just putting up a smaller Ferris Wheel for a fraction of the cost are plumping for the latter option.
With Challenger being a December financial year-end, I suspect this will all come to a head by the time results are out at some point in the first half of 2017. So why hang around? Sell now!
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