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By HotStockRockets | Tuesday 4 July 2017
Disclosure: Financial Investigative Media Limited, which is not owned by Tom Winnifrith but by a trust for his dependants, owns shares in companies mentioned in this article. 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.
"When's the Big Sofa (BST) placing?" said one of our contributors after results last week. Well "there isn't one" said the company. Over at Value the Markets they claimed that the company had guided that it would do calendar 2016 sales of £1.5-£2 million when it listed (sales came in at £757,000). Given that miss VTM said "take profits" and Leon Boros of the discredited abusers and rampers nest that is ShareSoc tweeted this aggressively. But there was no official guidance from the company- that was not true. The company listed on 19 December 2016 - is anyone really claiming it guided to £1.5-£2 million 6 days before Christmas and 12 days before the year end when it would have know that its sales just ahead of the Christmas break were going to be c £757,000 ( the eventual FY number) . What total bollocks.
The bottom line is that sales were indeed a mere £757,000, that was c100% up on 2015. Sales in June 2017 will be thrice what they were in January 2017. And those close to the company expect sales by December to be 3-5 times higher than they are in June. In the results statement came confirmation that Proctor & Gamble was indeed the key second contract signed after IPSOs. It will eventually be worth £1 to £1.5 million per annum. We are told in the results that already - after just a few weeks - £500,000 of proposals have been submitted by £190,000 has been commissioned.
The company seems confident that there will be more P&G type deals announced over the summer and that will mean that breakeven is achieved by November.
That brings us to cash. At the year end - post the £6.1 million RTO - it stood at £2.5 million. Trade receivables were marginally greater than trade payables. Cashburn last year was £2.6 million but this year has seen a dramatic ramp up in revenues but also an expansion of the overhead. Given when the Ipsos, P&G and other big deals come onstream 2017 results will be second half weighted but by controlling the rate of hires to match the growth Big Sofa can safely say that it is not running out of cash. There is no placing coming lwithin days as those who have not spoken to the company or deluded and sordid fantasists such as one expects to find writing on the ShareSoc blog might suggest.
If a truly big contract arrives there may be a need to do a small placement for working capital. But that would hardly be a disaster and Adam Reynolds and management would essentially underwrite any such offer. This would not be a discounted bucket shop gig. But there is no certainty that this will be needed . Right now, on the record the company says "there is no placing."
So what are forecasts (in the real world not lets make things up at Sharesoc/VTM la la land). We refer you to our last update from a couple of weeks ago. Thanks to idiot comment the shares were sub 25p on results day when we urged our readers to but more - they are now 26.25p Two weeks ago we wrote what follows and the results strengthen us in that view.
"Historically Big Sofa has generated revenues from numerous small contracts worth £5,000, £10,000 or £15,000. that is great but it does not offer visibility. The strategy now is to secure major deals like Ipsos and today's deal which may take a few months to ramp up but will in due course generate revenues of £1 to £1.5 million each per annum. We now have two such deals.
We gather others are close to being concluded so that by the late Autumn there should be, at least 4 bedded down and onstream which means that a fixed overhead of just under £5 million per annum will be covered and the company will be profitable. Given that it raised £6. 1 million last December cash will on that basis not be an issue. Yes the company will lose money in calendar 2017 but should end the year with at least £2.5 million in the kitty.
The joy here is operational gearing. Adding on a fifth or sixth contract would add very little to the cost base and indeed the internal plan is to build up to 12 such contracts by the end of calendar 2019.. So lets assume that each contract does grow to £1.25 million ( we are being cautious).. On that basis with – say 6 on stream for the whole of 2018 sales that year would be at least £7.5 million.
Assuming some additional cost plus general inflation plus cost increases overall, that would imply a pre-tax ( and post tax given 2017 losses) profit of £1.5 million and year end cash of £4 million.
But in 2019 on, say 10 contracts, the sales number goes to £12.5 million ( and that could well be closer to £15 million) and profits to, at least £5 million. Even on a full tax charge that is earnings of £4 million ( and year end net cash of £8 million). Such a growth play would surely merit a PE of 15 + cash? That implies a market cap of £68 million which is c120p per share.
Okay we are not going to get there tomorrow. There is a time discount and a risk of non delivery but so far so good on that score and we are assured there is more to come over the summer. At some stage brokers will start to cover this stock and offer official forecasts and at some stage that will attract institutional buying. We are not there yet but at a £20 million market cap that would start to happen and we will get there sooner than you think.
At 23p the market cap is now £14 million. Before the city wakes up BUY greedily at up to 25p – our initial target to sell is 50p but that may well be far too cautious."
Say thank you to those who spread untriths or made uninformed comment. That can be an opportunity for those who can be bothered to do any research. If you can buy any at 25p or under buy greedily.
This article first appeared on HotStockRockets - to catch the next red hot share tip from the HotStockRockets team out shortly as well as two SCORCHERS we tipped on FRIDAY 30th June, for just £5 click HERE
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