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Why a research note from a house broker is just so much shite - possibly the worst note of 2017, Arden on the Mercantile Norfolk

By Tom Winnifrith, The Sheriff of AIM | Sunday 16 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.


The house broker on AIM earns its money not from investors but from corporates. It banks £2-4,000 a month as a retainer and then makes 5% commission on any funds it raises. Lovely jubbly, coke and hookers all round. Of course that makes its research less than impartial. Prostitutes do not tell their clients that they have a small dick and so you would not expect Arden Partners to conclude that shares in Mercantile Ports & Logistics (MPL) are worthless crap, which they are. Welcome to a strong contender for the worst research note of the year to date.

Even as house broker, an analyst is meant to show some balance. So you would have thought that number cruncher Daniel Slater of Arden might have mentioned the "colourful" career of Mercantile's chairman Nikhil Gandhi, all the missed targets and the lies told in various RNS statements. But oddly he fails to discuss these matters, focussing instead on the tremendous upside.

Maybe readers of our series of exposes HERE might like to contact Daniel on 020 7614 5947 or [email protected] to see if he is aware of these matters and, if not, perhaps he might like to write a new note incorporating them in the interests of balance?

On our side, in the interests of balance, here is some unmitigated PR puffery, sorry broker research from Arden on Mercantile. For the avoidance of doubt my own stance is SELL with a target price of 0p which will happen either when Nomad Cenkos quits or when Mercantile runs out of other people's money.

Mercantile Ports & Logistics* (MPL LN) – Forecasts update

Buy, Current Price 3.8p

Key Points: Mercantile recently released its 2016 results, reporting year-end net cash of £3.4m (£35.7m gross cash), ahead of our forecast £22.8m net debt position due to the pace of CAPEX spend on the Karanja project versus our assumptions. Gross cash stood at £25.0m at the end of May 2017.

The results contained an update on construction progress, reporting that 90 acres of land have now been reclaimed (of a total of 200 acres), with sufficient material onsite for reclamation of a further 10 acres. For the jetty, 160 piles out of 240 have now been installed (enough for 250m of the 400m jetty), with deck slabs for 150m of the jetty now fabricated onsite. As a result of port configuration discussions with the EPC contractor, Mercantile now plans to use both sides of the 400m jetty, allowing for a total 800m of quay length.

We are now into the approximately four month monsoon period, when construction progress generally slows down. Mercantile also experienced delays during H1, principally due to the deterioration of site access roads (now repaired) and greater-than-expected rock presence in the harbor basin inhibiting piling activities. This now means the facility is not expected to be completed until 2018 (end 2017 had been targeted), though commercial, revenue-generating operations are expected to begin by the end of this year. We have adjusted our forecasts below to reflect this.

Forecasts: We have adjusted our 2017 forecasts, taking what we hope will be a prudent base case of zero revenue this year. Our P&L loss for the year actually reduces due to the timing of depreciation as we push port start-up into 2018. We have also updated our CAPEX profile, improving our net debt forecast. We also publish numbers for 2018, based on a steady facility ramp up profile.

Dec 2016E: Sales £0.0m, PBT (£1.1m), EPS (2.0p), Net Cash/(Debt) £3.4m
Dec 2017E: Sales £0.0m from £1.9m, PBT (£2.1m) from (£7.5m), EPS (0.5p) from (1.8p), Net Cash/(Debt) (£43.0m) from (£66.1m)
Dec 2018E: Sales £10.7m, PBT (£7.6m), EPS (1.8p), Net Cash/(Debt) (£47.2m)

Valuation: In addition to the changes above, we have also updated our long-term port capacity ramp up and pricing assumptions, adjusted our currency conversion for weaker sterling, and rolled over our valuation date. Overall this moves our DCF based NAV from 22p/share to 20p/share.

Conclusion: Mercantile continues to make steady progress at Karanja, and the project’s current position is the result of years of work. Periodic small delays to construction are frustrating, but of no great surprise in our view, and we believe that there could be further minor slippages. Irrespective, the project is moving towards initial commercial operations and completion, and the MOUs signed in H1 give comfort that Mercantile will be in a position to attract customers and generate revenues once the Karanja facility is in a position to do so. The £36m equity raise completed in Q4 2016 was designed to complete project funding and provide working capital during ramp up, and the company continues to benefit from this. Going forward we look for further construction progress, ideally no more slippages, and the commencement of revenue-generating operations. The shares could respond to positive news on all these fronts.

Analyst: Daniel Slater 020 7614 5947 [email protected]

*Arden Partners acts as broker to this company


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