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7digital Group – 2016 results argue “good progress” & “ideally positioned”, so why are the shares lower?

By Steve Moore | Friday 10 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.

Digital music and radio services group, 7digital (7DIG) has announced results for the 2016 calendar year, including that this “was a year of good progress… as we delivered on our commitment to reach operating profit by the year end” and that it “is ideally positioned to capitalise on the continued growth of streaming in 2017 and beyond”. So why are the shares currently approaching 7% lower, at 6.75p?

Helped by currency gains, revenue was increased to £11.9 million though there was still a loss of more than £5 million as working capital gains limited the net cash outflow. The announcement argues “cash at period end of £838,000”, though the balance sheet also showed more than £1.5 million of “loans” and a swing from current assets over total liabilities of £2.2 million to a deficit of £3.8 million.

“Ideally positioned to capitalise on the continued growth of streaming in 2017 and beyond” hey?!?

Instead, it is no surprise to see a fundraising announcement in conjunction with the results - £3 million being sought at 6.5p per share. However, the company also announces that “we have agreed heads of terms for the (approx. £1.66 million all-share) acquisition of our only remaining significant European competitor, 24-7 Entertainment… which would materially strengthen revenues and, in 2018, be earnings enhancing”. Hmmm.

Meanwhile, “the board remains committed to being profitable at the operating level for the full year in 2017”, though what about capex? And it is also admitted that “the timeline required to close sales contracts and the order value of individual sales continues to vary considerably, which constrain the ability to accurately predict revenue performance”. With such visibility and (continuing) financial doubts, I avoid.

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