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Xeros Technology Group: More cash please, Mr Woodford

By Cynical Bear | Thursday 13 September 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.

Nice of Tom to set me up for this one today with his preview yesterday (HERE) and, to no-one’s surprise whatsoever, Xeros Technology Group (XSG) published its interims this morning showing continued significant cash-burn and a need for another chunk of dosh from Mr Neil Woodford and his pals.

By way of background, I first started covering Xeros at the end of last year (HERE) following its placing to raise £25 million at 225p with the price jumping up to around 250p following that. It looked like absolute nonsense to me at the time and I wondered whether the share price could drop 90% in a year.

It is well on its way having dropped further this morning to around 43p, so we’ve breached the 80% drop level and with a clear need for another £20 million or so, I reckon my prediction might be bang on the money by the end of the year.

To be fair, there are a few green shoots here as the revenue has grown in the six months to 30 June to £1.9 million; however, it is still failing to make a gross profit and operating cash outflows for the six months were over £12 million. With additional capex, the cash balance has dropped from over £25 million at the start of the year to £10 million. With no drastic changes happening imminently, I think it is obvious to anyone that the cash by the end of this month will be under £5 million and the hat must be being passed round as we speak.

As Tom explained yesterday, there are three key shareholders here – Woodford (25%), Invesco (22%) and IP Group (17%) – and so the only question in my mind is whether they are all going to chuck another £8-10 million each into the pot to give it another year.

The commentary throughout today’s results is relatively positive with a move to an “IP-rich asset- light model” thrown around throughout which sounds a lot better than “we make washing machines that no-one seems to want”, even if I’m not totally bought in to the idea that this is suddenly a tech business.

Nevertheless, there is definitely enough in there with potential new business in the tanning and textile spaces for Neil Woodford to throw more of other people’s money into the mix – he doesn’t need much after all. I Would have thought IP Group could find £5 million or so to hold its corner and support too but whether Invesco will be tempted is another issue as this was never Mark Barnett’s investment in the first place and it is pretty small beans.

The fact that the rescue funding wasn’t announced in conjunction with today’s results shows that it is not as simple as one would hope and I suspect that Woodford may need to take the lion’s share of the round here to try and get it away a la RM2 International and Sphere Medical. The one good thing for Woodford is that this is a quoted stock so even if he sells some Purplebricks or Prothena to fund this dog, it doesn’t affect his unquoted percentage which is at or close to its limit, just the general quality of the portfolio, but let’s not worry about that.

We should find out how this plays out within the next month or so and I will be watching.

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