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Rurelec – good news sees shares leap as Board cheats the Grim Reaper again

By Nigel Somerville | Saturday 11 February 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.

Shares in AIM-listed Rurelec (RUR) sprang into life late yesterday after the company released news of a three-way deal which looks to have relieved at least some of the balance sheet pressure the company has been under of late. It is not out of the woods by any means, but shareholders have had two positive RNSs which suggest that all may not be lost.

A couple of weeks ago the company was facing statutory demands from IPSA – a vehicle of former Rurelec chief Peter Earl - which looked horribly as though insolvency proceedings were a small step away. Happily, those demands were withdrawn although the statement (on 31 January) gave nothing else away. One might have been forgiven for wondering whether it was just a sticking plaster rather than a solution to the problem.

But yesterday came a much more positive missive. To paraphrase, the company owed money to IPSA, which owed money to Ethos which had a hold over two gas turbine packages owned by Rurelec. These turbines are worth a few quid: £16.2 million – more than the company’s market capitalisation even after yesterday’s 36% share price gains - according the company’s FY15 accounts, so this is an important deal to protect the company’s ownership rights.

Now a deal has been done whereby Rurelec pays up some cash coming in from its Argentina project to Ethos and provided that all works out then Ethos assigns the debt owed to it by IPSA to Rurelec and that gets IPSA off the company’s back.

Of course, the debt hasn’t gone away - it is just payable to someone else - but the immediate crisis is alleviated. I guess it is death postponed once again. Rurelec’s board does seem to be making a bit of a habit of cheating the Grim Reaper.

Going forward, the company has been surviving on short-term loans and running on a shoestring and there is no sign of that coming to an end just yet. It still has a string of debts queued up and the company’s last set of numbers (interims to June 2016) made it clear that the forbearance of creditors was a critical factor in keeping the lights on.

What the company really needs is a solid funding package, rather than short-term funding, or a decent sale of assets. I have no doubt that efforts towards the latter are being made, but it’s hard to dance with the Devil (of debt) on your back.

Interims to last June showed net assets of 7.2p per share, as against yesterday’s closing price of 1.8p in the middle. This might make the shares look like a tempting speculation, but the risks are too high in my view: what if the forbearance of creditors comes to an end? What if the assets can’t be sold for anything like the value held on the books, or simply can’t be sold at all?

Rurelec’s board looks to be caught between a rock and a hard place, but I take my hat off to it for keeping the company going at all. I guess it’s not over until the fat lady sings and so far they’ve kept a muzzle firmly in place.

So whilst harbouring quite an admiration for the new board, I still wouldn’t touch this stock with a bargepole.  Not yet, anyway.

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