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Tern – Was this week’s RNS actually a massive SELL note?

By Cynical Bear | Thursday 6 July 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.

Having read Tern’s update on Device Authority and Nigel’s take on it HERE, I wonder whether there is a bit more to say as on a further re-read, I actually think that Al Sisto, Tern’s CEO, is admitting to all that the current share price is massively overvalued and shareholders should be heading for the door. Sounds like sage advice to me.

I won’t repeat too much of Nigel’s piece but it is worth reiterating that Tern is only an investment company in name really. When looking at valuation, one needs to focus almost solely on its holding of Device Authority, which makes up over 95% of the investment portfolio valuation.

Tern holds about 57% of Device Authority’s A shares and it is in the books at a valuation of £10.5 million following the most recent funding round (which had no real independent valuation obviously), valuing the whole of Device Authority at £18.4 million or $23.2 million.

That’s enough of the background; let’s take a look at the Device Authority update. It was a puff piece talking about independent patent valuations and stated as follows:

“IpCG estimates the risk-adjusted Net Present Value of the subset portfolio to be approximately $9 million over a five-year period beginning in 2018, and $18 million over the life of the portfolio (with an average expiration year of 2030).”

However, the interesting piece to me was the comment by Al Sisto that followed and I have underlined the crucial piece:

“I am delighted to be able to report the conclusion of the independent valuation of Device Authority's suite of patents by ipCapital Group.  While this should not be seen as a direct comparator for the valuation of Device Authority as a Company, the Board of Tern does see this patent valuation as a validation of the market relevance of Device Authority and its technology, in this rapidly growing sector."

What a strange thing to say!

Don’t you remember that the business is meant to be worth $23 million, Al? Why didn’t you say something like: “This independent patent valuation reconfirms our own thoughts on the inherent value here…..”.

I suspect that the Nomad, WH Ireland, should take some credit here as it feels as if someone has said:

“Hold on a minute, this is just a mindless ramp using largely meaningless numbers, you’re going to have to include some sort of caveat on valuation as Device Authority is worth nowhere near $18 million!.”

Well done, if that was the case but it re-emphasises to me the fact that the valuation of Device Authority at the last funding round was a fabricated number to suit the various stakeholders involved rather than a fair market valuation.

So how should one think about value here then with such limited information?

Well, we know that both Cryptosoft and Device Authority were losing roughly million quid or so per annum independently in 2015 pre-merger and with no recent announcements containing any revenue figures, I can only assume that the enlarged entity is making its way through the £2.5 million it raised last October very nicely.

Things will become more apparent when the enlarged Device Authority publishes its accounts for 2106 which are due by the end of September but I’m guessing revenue will be under a million and losses of somewhere between £1.5 million and £2 million.

Nevertheless, the cyber security space is reasonably sexy right now but if Device Authority was listed directly on AIM, it would just be the equivalent of a rubbish version of Falanx (FLX) which currently has a market cap of under £12 million. Personally, I wouldn’t value Device Authority at half of that but going with say £5 million gets me to a valuation for Tern of about 2p or less compared to a current market price of about 7.5p!

As I say, things will become clearer when Device Authority issues its results in September and when it next needs money, which will be by the end of this year by my reckoning; however, I would recommend getting out before then.

In fact, why not just take the implicit advice here of the man who knows best, Al Sisto, and get out now.

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