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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.
As we write the RNS states that an accelerated book build to raise £4.6 million is underway at Falanx (FLX). In fact the placing has been done and management is putting in about 7% of the funds with chairman Mike Read on the hook for £250,000+. This is a very good deal.
Let's start with the piffle spouted by some savants who say this is a disguised rescue bailout as Falanx has misled investors. They speak without having spoken to Falanx which said that it was on track to reach break-even by the second quarter of calendar 2018. It was and it still is. And it has a healthy net cash position. But today's deal makes a lot of sense unlike the knockers who speak from a position of ignorance.
There will be £3.2 million go to the vendors of First Base and they will also get warrants to subscribe for 800,000 shares at 4.5p. By the time you have knocked off the costs of the deal and the fund raise, there will be a spare £1 million which will be used, one suspects, for further bolt-ons. We are told:
First Base is a profitable cyber security testing and consulting business which was established in 1989. It has a broad spectrum of experience and a customer base of c.200 customers. These customers are spread over multiple vertical markets and range from SME's to FTSE 100 organisations. As well as traditional assessment and penetration services it is growing a wider consulting practice including "red team" assessments on wider organisational vulnerabilities. The business is based in Sussex near Gatwick airport.
In the year to 31 March 2017 it reported revenues of £1.8m and EBITDA of £0.6m and had a NAV of £0.7m. First Base also benefits from strong cash generation. Over recent periods, First Base has achieved annual revenue growth in excess of the wider industry growth rate and it is trading well in its current financial year. The acquisition is structured as an asset purchase as it is an LLP. First Base's 16 staff and customer relationships and contracts will transition into a new wholly owned subsidiary of Falanx, along with a normalised level of working capital.
So on a pro-forma basis we had forecast that Falanx would in the year to March 31 2019 (ie the one starting in a few weeks) make a pre-tax profit of £500,000 to £1 million. We now forecast that with some synergies (you don't need two sets of book keepers etc) group PTP will be £1.3 million to £1.8 million.
On a proforma basis the market cap at 4.5p would be £11.7 million. Strip out net cash of c£1.5 million and the ex cash earnings multiple is somewhere between 5.7 and 7.8. For a growth stock with a strong balance sheet in a hot sector that is just far too low. And this is a growth stock. For the year to March 31 2020 (which in just 26 days will be the forward not the current year) we expect PTP to be well in excess of £3 million.
Even on the bottom of the range March 2019 forecasts the shares should be on a mid teens multiple and should thus almost double from here. At the top of the range a trebling is possible. The stance is STRONG BUY at up to 6p with a target to sell of 8p+.
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