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CSF Group looks screwed, yet the pump continues!

By Gary Newman | Friday 8 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.

Hardly a day goes by on AIM without some complete piece of junk being pumped up to some crazy share price level, and it often happens as a result of private investors failing to actually read RNSs properly and understand what they mean. Today has been the turn of failing IT company CSF Group (CSFG).

This sets up and manages overseas data centres and had seen its share price performing very badly - trading around the 0.7p level, up until early August when there was an announcement about the possible disposal of one of its subsidiaries. The RNS also made clear that there had been no contract wins since the end of March 2016 and nothing else that should have been causing the share price to be rising in the way it has been from around that time onwards.

Rather than taking any notice of what the company was saying, PIs went on a buying frenzy and the share price rose to over 4p, before pretty much halving, and now we have seen a further large rise based on today’s news that a disposal of one of the assets will be going ahead.

This has led to all sorts of speculation on the bulletin boards as to how much such a disposal would be worth, with all sorts of crazy figures being bandied about. What many seem to be missing – although it is hard to see how unless they are unable to read! – is the statement in the RNS saying that any disposal will be for a nominal amount. That often means that as little as £1 will be paid for the asset, purely so that the deal has a monetary value i.e. the asset is worthless to the original owner and they just want rid of it.

That would very much seem to be the case here and CSF just want to get rid of something which is currently a liability and also possibly reduce rent associated with that part of the business currently.

My reading of this is that the disposal will simply reduce liabilities on the balance sheet – net liabilities stood at over RM27 million as at the end of September 2016 (around £4.9 million) – as well as potentially reducing the £1.3 million loss that the company made for the six month period up until the end of that period.

If we go back to last autumn, the directors of the company actually sought to de-list the shares as the company was unable to raise any capital – nothing has since changed there – and the business was no longer seen as even being worth the £200,000 per annum listing costs. Shareholders voted against that, but given what has happened in the meantime I certainly can’t see the situation as having improved at all since then, and I would suspect that it is only a matter of time before this ceases trading.

A large reduction in gross margins in recent times has meant that the company isn’t even making any money on an operational basis, as it made a loss in excess of £500,000 to generate revenue of £5 million or so, during the six month period referred to in the last interims.

At one point today the share price hit 6p, and even now is still trading at 3.5p to buy and a market cap in excess of £5.2 million, which seems to be a crazy amount for a company that would appear to be worthless, and whose financial situation is likely to have got even worse in the 12 months since it was nearly delisted.

It did have nearly £8 million in the bank at the end of last September, but given the previous losses it was making – cash burn since then is likely to have been in the order of £2.5 million – and allowing for liabilities, the situation is worse than it would appear and if the company was wound up it is unlikely that any cash would be left for shareholders.

Full year results are due, and it is unlikely that they will be pretty, and I would expect to see this trading back below 1p in the near future, with a very good chance that it will eventually go bust.

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