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RM2 International: Interims as bad as expected, I reckon Woodford is tempted…

By Cynical Bear | Friday 14 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.

Following the poor trading update last week from RM2 International (RM2) that I covered HERE, its interims were issued this morning and are largely as expected but still worth a quick look and it’s time to place your bets as to whether Mr Woodford is going to throw another $17 million in to the pot.

One piece of relative good news to note first, namely the appointment of two new Board Directors, David Binks and Andrew Geisse which ticks the corporate governance box.

On to the numbers and with so many challenges in the business it is perhaps not a huge surprise that revenues have declined in the six months from $3.7 million to $2.6 million. The cost of sales remains ridiculously large at $13 million but apparently only $7.9 million of that is a cash cost so that’s ok then!

Despite cost savings, the business still has a significant admin expense although it states that the monthly cash burn is now down to $0.8 million.

The bottom line is that unrestricted cash stands at $12.9 million as at 30 June 2018 and the cash outflow from operational activities in the first half was over $11 million. In addition, if it is going to bag one of these significant contracts, it will clearly need further funds to build up inventory. Accordingly, the point is reiterated today that the second tranche of funding of $17.8 million will be required later this year but it remains confident of hitting the milestones necessary to trigger it. As I stated before, it will come down to a decision by Neil Woodford in the next couple of months as to whether to pump in a not insignificant amount of money.

Regardless of the most appropriate business decision, I think he will end up weighing up the least embarrassing way forward for his funds. If he pulled the plug now on RM2 could that be the final nail in the coffin for the wider empire with more redemptions from the Equity Income Fund as a result of the publicity? I’m not sure but why take the risk when one can just pump in more money instead and postpone the inevitable into mid-2019.

One other observation is that whereas uber-dogs RM2 International and Xeros Technology Group published their respective interims out by mid-September, Allied Minds (ALM) and Woodford Patient Capital Trust (WPCT) are still yet to do so - how bad are they going to be?!

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