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By Tom Winnifrith | Tuesday 13 March 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.
You rather lose count after a while. The first 2017 profits warning was on August 7, when mortgage fraudster and fugitive from US justice Uzi Katz served up the interims. Thereafter with insider dealer Yosi Fait taking over Telit Communications (TCM) has served up so many profits warnings that I have almost lost count. And today there is another...
We are told:
Telit plans to publish its results for the year to 31 December 2017 in April. The Group has resolved to adopt a conservative approach in the preparation of its results, and in particular with respect to the capitalisation of R&D expenditure. This decision, taken in the course of preparing its results and after a review of its capitalised R&D assets, will have the effect of significantly increasing R&D expenditure charged to the income statement to a level higher than previously forecast.
This, combined with establishing a prudent level of provisions and other adjustments with its auditors and some component shortage issues which affected sales in the closing weeks of 2017, leads the Board to now expect to report revenue of approximately $374-376 million and adjusted EBITDA in the region of $20-23 million (excluding exceptional costs in relation to the restructuring of the business). The Group's net debt position as at 31 December 2017 was $30.2 million (2016: $17.7 million).
Of course EBITDA is bullshit earnings. There will be a heavy charge for D, A and I so expect a pre-tax loss even before all the restructuring charges. And that is why net debt has increased during the year despite the $50 million placing in May. As to that debt, Telit always tends to owe suppliers more than it is owed by customers so the real figure will be materially higher $40-50 million.
Not surprisingly, even though Telit claims that the first two months of 2018 has been ahead of 2017 and forecast ( not exactly a confirmation that it is profitable and generating cash given the comparators) it is having to change the covenants on its bank debt. It says "The new covenants are more appropriate for the Group following its rationalisation of product lines and costs. In particular, the covenant, which in broad terms measured the ratio of free cash flow against debt service obligations, is replaced for 2018."
Why has the bank agreed to waive covenants which have been breached at least three quarters on the trot? Has it charged a fee for this? Has it extracted undertakings regarding a n equity issue if no disposals are made to clear the debts? We are not told.
On the subject of disposals, on 29th January were were told with regard to its auto division: "Telit has received interest from numerous parties and a range of proposals have been received, which are subject to due diligence. There can be no certainty at this stage that the division will be sold nor as to the terms of a potential sale.
It is odd that there is no news on that matter. No news is bad news.
Telit shares are down today to 162p but that still values the company at £207 million. Given its colourful management past and present, its inability to generate cash, the EV of at least £240 million is simply far too high even if the prized auto division is offloaded. The stance remains SELL
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