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Another Woodford money pit – Thin Film Electronics

By Cynical Bear | Sunday 7 January 2018

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 wouldn’t normally cover stocks listed on the Oslo exchange but Thin Film Electronics was mentioned in the comments of a recent Woodford piece and I also noted it was the Share Punt of the Week in the Daily Mail on Friday, so if it is good enough for them to recommend a Woodford-backed cash guzzler to its brain dead readers, it is appropriate for me to provide another side to that story, especially as the cash burn here is off the scale.

To be fair, Thin Film doesn’t look like a mad idea in quite the same way as the pallet-disruptor, RM2 International (RM2) does. It provides “smart” electronic labels for products that can be read in store by mobiles which can facilitate exciting and interesting marketing opportunities. It’s not totally clear to me how this is different to using QR codes but I will take it at face value for now that these smart labels are the bees knees and are useful in the world of the Internet of Things. As I say, it makes sense to me at a very high level.

Where it does remind me of RM2 though is in the cash burn stakes and it is in this area that it excels itself and looks to be a real world-beater.

Here are the revenues, profit numbers and operating and capex cash outflows for the last few years:

Year to 31 December 2014 (translated from NOK)

Revenue:                      $3.4 million

Operating loss:             $19.6 million

Op/capex cash outflow: $22.4 million

Year to 31 December 2015

Revenue:                      $4.4 million

Operating loss:              $31.8 million

Op/capex cash outflow:  $31.4 million

Year to 31 December 2016

Revenue:                       $3.8 million

Operating loss:               $41.5 million

Op/capex cash outflow:   $42.8 million

9 months to 30 September 2017

Revenue:                       $4.7 million

Operating loss:               $41.1 million

Op/capex cash outflow:   $62.1 million

That is just nuts. That’s about $160 million sent skywards in less than four years and over $60 million in the first nine months of this year alone!

Don’t get me wrong, I’m not against growth stocks in principle and I understand that in certain situations, such as with Amazon or Spotify or Uber for example, one needs to spend a shedload of cash to land-grab and become huge in terms of users or revenues before worrying oneself about profitability.

That’s all fine, but that is not the case here. Thin Film is yet to prove that the opportunity is huge as the growth has been pretty mixed and relatively pedestrian to-date and yet it is spending money like it is going out of fashion. This is extremely reminiscent of RM2 International – wouldn’t it make more sense to try to generate customer traction first and then step up production and global expansion plans once there is a clear market and opportunity?

Does it really need to have six global offices? Did it really need to spend so much on a new production facility? Did the senior management really need to take out $3 million in salary and bonus in 2016?

It almost goes without saying that this sort of thing is right up Woodford’s street. He first invested about $42 million in February 2016 acquiring 120 million shares at a share price of NOK 3. That money vankshed in a blink of an eye and so there was a follow-up round of $60 million in December 2016 at a share price of NOK 3.91. It was hoped that these funds would last well into 2018; however, the funds lasted a mere 9 months and so there was a further astonishing $110 million raise in October 2017 at NOK 2.50. Woodford participated in both of those latter rounds.

As ever, Woodford is now the largest shareholder holding 24% in total with 20% in the Equity Income Fund and 4% in Woodford Patient Capital Trust (WPCT) and I estimate that Woodford has invested $100 million or so in total so far.

I have no view on whether Thin Film is going to be the next big thing in smart electronic labelling although I do acknowledge it is in an interesting space and there is some limited growth being shown this year; however, it has a long way to go to make significant inroads into its incredibly high cost base let alone start generating any cash.

The issue for Woodford though is, ironically, that this is a quoted stock and with the business failing to kick on as hoped, the share price is dwindling and is currently at NOK 2.27, so Woodford is well under water at the moment, although the business as a whole is still valued at over $300 million. My instinct is that Thin Film has to make good use of the $100 million or so it has left in the bank right now otherwise it will find it much harder to raise the next round some time in 2019 and could collapse a la RM2.

It would be so much easier in some ways if Thin Film was unquoted and Woodford could decide the price himself - sorry, I mean use his highly disciplined valuation approach to decide the value from time to time - and wouldn’t have to mark his book down each day as the share price drops; it's a shame there’s limits on those sorts of things.

Not to worry though Neil, I’m sure you’ll get some buyers from the Daily Mail readers to give the share price a boost on Monday - am sure they trade stocks on the Oslo exchange all the time!

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