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.
It was my great privilege to speak at The UK Investor Show this year, along with the illustrious bears and short-selling raiders Lucian Miers, Matthew Earl and Gabriele Grego. For my choice of bear tips, I again went for the easy target of Fastjet (FJET) (down by over 70% since I first mentioned it in November 2015), but my new tip was the rarely-discussed pallet company, RM2 International (RM2).
I try to be gentle when discussing companies whose investment thesis is speculative. Not every stock is going to be a safe stock, and that’s particularly true for smaller companies and for new, innovative companies. But I can’t be gentle about RM2, because the numbers and the prospects are about as bad as I’ve seen.
Since I mentioned it at the Investor Show in April, the shares are down by over 30% to 15.25p, for a market cap of c. £60 million. It originally IPO’d at 88p in 2013, raising £137 million in new money.
The Wacky World of High-Tech Pallets
RM2 has come up with a solution to a problem that probably isn’t worth solving: how to provide the world with a better quality of pallet. In the world of logistics, pallets serve a very simple function: a flat, portable platform on which goods can be placed for easier transportation. Wood is a sufficient material, or if you want something that lasts a bit longer, you can get plastic ones. It fits the definition of a commodity product.
RM2 has invented new pallets, the BLOCKPal and the ElIoT, designed to revolutionise this boring sector. Precision-engineered using composite materials, the BLOCKPal and the ElIoT pallets last much longer than traditional one, survive more extreme temperatures, use less carbon over their lifecycle, and come with real-time tracking and analytics, to disincentive pallet thieves. Speeches have been made at Internet of Things conferences about the revolutionary nature of RM2’s location monitoring device. But remember: pallets are just flat surfaces, capable of transporting physical goods. Wood works. Plastic works.
Late and Poor Results
Composite materials with Internet of Things technology attached to them work too, but customers have not exactly been crawling over each other to get some. Revenues for 2016 grew from $8 million to just $8.9 million.
Those full year results for 2016 were announced on 30 June, the very last day on which they could be released. The loss for the year was $53 million, including gross losses of $31 million and ordinary expenses of $21 million.
Huge gross losses reflect impairment of pallets already manufactured, impairment of raw materials, and high costs in Canada as RM2 shuts down its own factory there and transfers its operations to outsource partners in Canada and Mexico. The outsource partners are contractually entitled to sell 2.5 million pallets per year to RM2. That will be interesting, since there are currently just 1.6 million pallet “opportunities” in its pipeline.
Facing this liability, RM2 has raised $20 million through the sale of convertible preferred shares, and says that it is negotiating to raise “at least” another $65 million. It also says that it will need to raise more funds in 2018. Needless to say, “the Group acknowledges that there are currently material uncertainties which may cast significant reservations on the Group's ability to continue as a going concern”.
However, it is likely to be safe in the short-term, as it has the highly valuable support of Woodford Investment Management. But that should be of little comfort to holders of the existing 400 million ordinary shares. Assuming the plans are voted through at EGM, there will soon also be 92.5 million convertible preferred shares outstanding, and these shares appear likely to enjoy a significantly stronger dividend entitlement compared to the ordinaries.
And with another $65 million in cash sought on top, the scale of eventual dilution this year could be staggering. And it won’t end there, according to the company’s own forecasts.
Bearing in mind the lack of meaningful sales growth, the failure to execute its original manufacturing plan, the very speculative nature of the products and the prospects for dilution, I remain of the view that these shares are to be vigorously avoided.
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