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Buy Big Sofa at 22.5p - target 60p

By Tom Winnifrith | Friday 8 September 2017

Disclosure: Financial Investigative Media Limited, which is not owned by Tom Winnifrith but by a trust for his dependants, owns shares in companies mentioned in this article. 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.

When this share tip appeared on FivefreeShareTips yesterday the shares were 20.125p to buyur readers got the best deal. Do not miss out on our next tips emailed direct to you: register now HERE. But at 22.5p to buy Big Sofa (BST) still is stunningly cheap. Here is why...

Okay three disclosures first. One: we own a shed load of these shares. Second they have not exactly flown since the IPO via a reversal at 17p. And third there has been a bit of slippage in hitting targets ( four or five months) and a £1.4 million placing at 18.5p was not exactly what the share price doctor ordered. However this stock is going to fly. My target is for it to almost treble, well before Christmas 2018.

So what does Big Sofa do? It is nothing to do with furniture. Big Sofa is a B2B technology business servicing the marketing and consumer insight industries with video analytics. Its software platform collates, analyses and organises large volumes of raw/unstructured video content enabling companies to perform detailed and sophisticated consumer insight analysis; and make genuine use of their video content.

The company asserts that until recently, video has been difficult and expensive to capture, upload, store, manage and analyse as a consumer insight tool. However, proliferation of smart phones has empowered consumers to speak directly to brands resulting in an evolution of consumer insight and data analytics techniques, with video emerging as a key platform in a massive $33 billion consumer research market.

It is all very well saying that the market is worth telephone numbers. All sorts of companies say that. The point is that Big Sofa already has big name customers including British Airways, Ipsos, P&G, and Unilever. And taking to the company it is clear that there is a stuffed pipeline of potential new business. I expect to hear news of a series of big contract wins over the coming months.

Contracts with such big clients easily generate revenues of £1-1.5 million per annum and tend to be multi-year contracts. The draw back is that they do involve some upfront costs with clients paying later. Hence the recent placing. It genuinely is for working capital needed to fund larger contract wins.

The only financial results we have had since the December 2016 IPO are for calendar 2016. as a near start up they are hardly relevant. Sales came in at £757,000 in 2016, with average monthly revenue approximately double that in 2015. But by June 2017 sales were thrice what they were in January and the big name contracts secured this year will really only start to chip in in the second half. Those that will be announced in the Auumn will really only make an impact from 2018.

What we have been told, post the placing, is that the company will hit operating cash breakeven in H1 2018 and that it has sufficient cash to see it through to that point. That £1.4 million placing was completed in 10 minutes witl the cash coming from NEDS - including Adam Reynolds - and four institutions: not bucket shops who will flip, proper long holding fund managers. My point? Had Big Sofa wanted to have raised more it could have done. It did not because it did not need it.

So what are the financials in terms of forecasts. The company has costs which are pretty much fixed - they will be c £5 million in calendar 2017. Next year- assuming that the number of big contracts is c6 by the end of 2017 rising to 10 twelve months later, I'd look for £6 million. So there will be a material loss this time but by calendar 2018 sales should be at least £8 million and pre-tax (and post tax) profits £2 million. In 2019 operational gearing really kicks in and so I look for sales of £12-14 million and pre-tax profits of £5-7 million.

A growth story like this should surely be on at least 10 times earnings but arguably 15 would be more appropriate. On a 2019 20% tax charge ( it will not be that high) that implies a valuation of £40 million to £84 million. Now I accept that is a wide range but at 22.5p the market cap is £14 million. Even at the bottom end of the range we get to a share price of 60p+ as we head into the second half of 2018 with real earnings visibility. At the top end of the range you are looking at a share price of 128p. But I am a cautious soul

Buy at 22.5p - the one year target to sell is 60p+

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