By Cynical Bear | Wednesday 6 September 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.
Interesting to see a new tech IPO this week with appScatter (APPS) joining AIM yesterday, raising £9 million at 65p. I thought I should take a look and only have the three concerns; the management team, the business model and the valuation! Taking each in turn:
Management - much is made in the Prospectus of the CEO Philip Marcella having previously bought an app developer business to AIM in 2000, namely RMR plc, at a valuation of £64 million, raising about £12 million. However, what it doesn’t go on to say is that about two years later, the business had blown the £12 million, had failed to generate much in the way of sales and the business was pretty much discontinued.
Interestingly, if anyone wants to see any of the old accounts or the Prospectus, one can find it HERE as AIM companies rarely disappear altogether, they merely evolve into new companies by way of RTO’s. Since 2002, RMR has been The Talent Group for about 12 years and then more recently Guscio and then GoTech Group (GOT). I am expecting the next Dr Who-style transformation within the next 18 months.
Anyway, back to RMR and appScatter. It is also interesting to note that appScatter’s Sales Director, Jason Hill, was also the Sales Director at RMR. Hmmm, well that wasn’t a great success so not sure I would be mentioning it. At its peak in 2001, RMR had sales of about £2 million but cost of sales of over £3 million. Now, I’m no Sales Director but even I could buy eggs in Malta for seven cents and sell them in Pianosa for five cents but I wouldn’t be making much money that way!
Business Model – my second concern relates to the business. I appreciate that there is money in the world of apps and the fact that appScatter has generated £700,000 up to May this year shouldn’t be sniffed at, but I have no real personal view on whether there is a market for this sort of business as it doesn’t really exist at the moment.
My concern though comes from an article I read which stated that the CEO had been previously searching for VC funding and then, when that had failed, joined AIM instead. Although this sounds counter-intuitive, this doesn’t surprise me as much as it did the author of that piece as I am seeing VCs becoming more risk-averse and less prone to taking a punt on pre-revenue or early-revenue stage businesses and the reality is that there is a lot more dumb money available on markets like AIM.
Venture capitalists in the main though are much smarter than me though and if they saw an opportunity in this space, I think they would have got involved. This is also why I start with a bearish stance on early stage tech businesses which one would think would be suited to venture funding but end up on AIM instead, usually by way of an RTO – EVR Holdings (EVRH) and BOS Global (BOS) are two that spring to mind.
Valuation – thirdly, the valuation here is somewhat surprising. At the 65p IPO price, the valuation was £41 million and I note it jumped nicely yesterday to around 75p, valuing the business at around £47 million.
For all the reasons above, that seems punchy to me. If this business is the panacea to app developers it thinks it is and generates enormous traction, then there will be plenty of opportunity to buy in later but bearing in mind the history of the management team and the unproven model, there seems to be plenty of downside risk - albeit that it appears to have sufficient funds to allow it to have a proper go over the next 18 months to two years.
The interims are due out this month which will give a slightly clearer picture of the current balance sheet and the cash burn and I will take another look then.
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