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Soaraway Tern explodes higher, but what of value?

By Nigel Somerville, the Deputy Sheriff of AIM | Tuesday 10 April 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.

Well I’m glad I removed AIM-listed Tern plc (TERN) from my list of slam-dunk sells for 2018 when the company announced it had binned its death spiral, and instead raised cash from a placing. I still don’t think it has enough cash, but apparently the market disagrees and the share have shot massively higher – from a low point of just over 2p in February, 4p by the end of March and now they sit at 9.85p (having peaked at 11.25p). What of the value of the investment?

Obviously having a death spiral in place meant the shares were only going one way, so removing it has been a big bonus. Instead of investors pricing in falling prices, they have a leveller playing field. That, to my mind, would account for some of the rise. But four-fold? Er….

So what has investors frothing at the mouth? We’ve had an updates on Tern’s principal investee, Device Authority (DA), telling us that DA has signed up a strategic partner in the form of Larsen & Toubro Infotech, another with Gemalto and that DA and fellow Tern investee InVMA have integrated DA’s Keyscaler with InVMA’s Assetminder. That’s all very well, but there have been no numbers. What sort of income and profit will they generate? We just don’t know.

Further, we also learned that the projected income for DA in the second half of 2017 was wildly optimistic. Of course, if Tern knows that then surely it knows the actual numbers – so why not announce them and have done with it? Or are they even more awful than announced?

And then there is the fundraise for DA being conducted by US Capital Partners – which seems to have been aborted last summer, and a re-run seems not to have made the starting line (yet). Meanwhile, Tern has had to pump more money in when it was quite clear that it expected to receive cash from the fundraise.

The other small matter is that the dilution suffered by Tern’s shareholders has been savage. Last June, with the shares hanging around the 8p mark, there were around 120 million shares in issue. Now there are 212 million – all of which have been issued at below today’s price, with some as low as 1.75p.

The good news, with all these partnerships, is that DA should see some income develop. But we don’t know when, or how much.

Yet Tern’s share price – with the last fundraise at just 2.55p – has raced up to 9.85p. It really is hard to justify, in my view – I think it is bonkers. Investors are buying in on hope – just as they did during the race to north of 30p, before the shares crashed below 2p. It seems to me that success is already priced in, despite there being no numbers to support it and an epic failure to deliver last year.

So be careful out there! I have a horrible feeling that Tern will want to cash in on this sudden rise, and judging by previous efforts, the discount could be huge. 

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