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By Tom Winnifrith, The Sheriff of AIM | Monday 7 August 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.
I am not sure if Neil Woodford had a big stake but Telit Communications (TCM) ticked all the other red flag boxes for AIM casino disasters waiting to happen. UK Investor Show attendees know that this has been high on the bear's hit list for a while. Today the train wreck happened and as I write, shares in what was the most shorted stock on the casino, are 39% down at 156p. But a £199 million market cap is still a rum and coke. The shares could be 20p and I still would not buy. Pro tem I count this as another big win for the Sheriff of AIM.
The first thing to note is that while the interims came out at 7 AM with the Nomad and broker being Canaccord at 7.01 Telit announced that it had a new Nomad and broker in the form of FinnCap. It failed to provide an explanation for the switch but such a matter is always unnerving.
Then we come to results for the 6 months to June 30th which are quite dreadful. The sheer awfulness of them has clearly come as a terrible surprise to the City hence the share price collapse which then brings into question this announcement from 24 May 2017:
Telit , a global enabler of the Internet of Things (IoT), has today been notified that Boost B.V. and Mariselia Ltd, entities controlled by Oozi Cats, Chief Executive Officer of the Company, have sold in aggregate 7,081,620 ordinary shares in the Company at a price of 340 pence per share (the "Sale").
Oooh er, so did Oozi have any idea of just how ffing dismal 2017 interims would be when 79% of the way through the period in question he flogged c£24 million worth of shares? If I was at the FCA and sadly I am not, instead it is staffed by utterly incompetent poltroons, I'd be asking Telit to provide me with full details of its weekly management accounts as a matter of some urgency.
So just why are the results dreadful. As is always the way Telit focuses on sales ( vanity) and EBITDA (bullshit earnings) but it cannot hide the fact that sales growth is paltry ($177.6 million cf $166.7 million). I compare and contrast that with the growth of trade receivables ($97.3 million cf $76.7 million) and trade payables ( $106.1 million cf $75.3 million). Somehow that does not seem right does it? Lets ignore EBITDA as it is meaningless for a company capitalising so many costs and whose customers seem in no great hurry to pay and focus on cashflow, always the issue at Telit.
Remember that in early May the company raised $49.7 million net in a placing at 340p. Hmmmmmm Canaccord will have earned c$2.5 million stuffing institutions into that one. I guess you can see why it really won't mind not being Nomad and broker after that. As for the fund managers who participated, well it is only (other people's) money and such astounding stock picking - in the face of myriad warnings from we bears - show why FM's deserve such vast salaries, because they really do know better, don't they.
In the half year the company spent $6.7 million on acquisitions and its net debt fell from $17.7 million as at December 31 to $9.9 million at June 30th. Put another way while blathering on about EBITDA the reality is that $35.2 million has been sent to money heaven in the six months. $17.9 million of that went on capitalised R&D ( not in the P&L) and another $5.7 million on general capex. There was the cost of last year's dividend at just over $5 million., interest costs, the fact that trade receivables lengthened, etc, etc etc.
The reality is that this is a company consuming cash at an alarming rate and one wonders what the net debt number stands at now, 5 weeks after the interims. The directors assure us that the company can operate within existing facilities but having sent almost $6 million a month to money heaven in H1 would you bet the ranch on it?
The balance sheet shows net assets of $169.9 million at the period end. But intangible assets are $123.8 million and given how much of a cash guzzler this dog is, a prudent auditor would be assessing them for a massive impairment review at the year end. And with the a cashburn of $6 million a month what odds would you give on Tangible NAV ( $46.1 million at the half year) being much more than a row of beans by Christmas. The market cap is now £199 million ( call that $260 million). The premium to NAV but mega premium to TNAV is wholly unjustified.
This is a train wreck and today is just the start. The red flags are everywhere. Vindicated at long last our stance remains SELL with a target of a row of beans.
It seems that the City agrees with me. The City's top tech analyst the onle and only Kevin Ashton writes:
Telit (£333m mkt cap) interims. Revs up 6% to $177.6m with IoT still a very modest part of the story at c. 10% of revs. GM squeezed to 39.2% (40.1%). Adj. EBITDA $14.7m (down from $21.4m) not least due to buying very dilutive businesses. FCF very negative as per usual, though not surprisingly, deteriorating significantly (to neg $28m from neg $10m last year) as all thoughts of becoming cash flow positive seem to have been thrown to the wind again. Despite all this the outlook is “encouraging” – yep : ). And despite the “encouraging” outlook there are some uncertainties including “the timing of certifications for the LTE CAT-1 VoLTE product and a handful of large scale deployments, all of which could be deployed slower than planned with consequent impacts on financial performance and cash generation in the current year”. Well, all very remarkable. I think especially remarkable is the $47m placement in May (which has been handsomely run down already) and the CEO share sale in the same month. Hard to find a stock with more signals you should steer clear of it really. There’s a broker switch too (which must be a substantial relief for a certain analyst in the City).
Sadly for my pal Lorne Daniel at FinnCap it is not him that will be breathing a sigh of relief as he does the bidding of the jackals in his corporate finance and broking departments. When he has finished his next buy note on TrakM8 (TRAK) poor old Lorne will be forced to try to work out how to polish Oozi Cats' turd. Lorne, you have my sympathies.
Tom Winnifrith notes: The above article has been revised after publication as per my agreement with Roger Lawson here. Although Roger Lawson may not have reported his ownership of shares in a company when writing about them in all cases, or did not report his trading in those shares, as may be considered best practice, I acknowledge that the rules about ShareSoc publications did not require such repetition and I acknowledge that he acted without any intention of making any financial gain to himself and indeed no such gain was made.
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