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Sosandar – a pissed-off bull speaks!

By Nigel Somerville, the Deputy Sheriff of AIM | Friday 12 October 2018

Disclosure: I own shares in one or more of the stocks mentioned. 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.

I continue to hold a small parcel of shares in AIM-listed Sosandar. I had been hoping to offload a few more at 50p but in the wake of a placing at 32p and the market sell-off that seems somewhat optimistic for some time to come. Tom Winnifrith sold all his shares some time ago and has commented on the update from the company and the placing at 32p HERE and HERE. So I thought I would throw my 2p worth in as well.

Firstly, on the placing, I had a triumphant email from Cynical Bear who had postulated that the company would find the temptation to raise more cash too much to bear, with a share price that was in his view well ahead of events. On the one hand, one could argue that it was the right thing to do if the shares were heavily overvalued. One might even call the move prescient, given the market sell-off which followed it.

On the other hand, broker Shore Capital had put out a note not so long ago proposing fair value not at 32p but at 50p. So how can they justify conducting a placing at just 32p? It either means that the 50p price was nonsense (well, it is House Broker….), Sosandar had spent all the cash from the IPO or the 5% commission (so around £150,000) took care of any lingering guilt over legging over the investors. I’m not sure which is worse!

It does seem to be really hard to raise cash on the Casino at the moment – as we know from the nonsense at Premaitha (NIPT), where Adam Reynolds had to step in to avoid shareholders being decimated by FinnCap’s uselessness (and I hope the company sacks it!) and Big Sofa (BST) where shareholders have been decimated by management uselessness and a massively dilutive fundraise by house broker Arden. There are plenty of others. I guess I should be pleased they got the cash, but I am not.

It leaves a horrible taste in the mouth and the shares have been further punished in the sell-off to leave stock below the placing price. Normally I would say that it a bad sign, but the sell-off has been pretty severe and Sosandar remains a country mile from profitability so perhaps it was one of the first to dump with the change of mood.

We also got a half-year trading statement. I had been too bullish on this stock, but I am still very keen – that is why I have held on to a chunk of my shares. I hope to be proved right in the end, as we see turnover ramped up and profits start to roll in. But it will take longer than my best-case scenario.

I noted that Q1 (to June) turnover was up by some 73% when the FY18 results were published, and calculated that this meant that Q1 turnover was £0.83 million. Now we have been told that H1 revenue came in at £1.84 million, which means that Q2 racked up about £1 million. Having been told by those who know this market better than me that August is normally a bit of a write-off (summer costumes bought and customers on holiday) one might consider that £1 million was turned over in just two months. If we extrapolate that to three months (with customers not on holiday) we have £1.5 million. Compared to Q1, that would represent Q-on-Q growth of around 80%. It seems, then, that the 73% growth of Q1 was not completely out of the ordinary.

I note that against the forecasts our (not so) friendly neighbourhood house broker, which offered FY revenue of £3.9 million, with £1.84 million already in the can at the halfway stage it seems that the FY forecast assumes almost no growth going forward. It is no surprise, then, to note that Sosandar’s management is apparently extremely comfortable with the forecast!

Indeed, on the basis that Q3 includes December (and I am told that has much the same effect as August) we might be looking at turnover of perhaps around £1.7 million if this 70-odd% growth per quarter still continues, even allowing for a dead December, and Q4 which could rack up 70-odd% growth again, but this time with three full months of trading. Anyone for six or seven million of revenues at the full year? Oops, my rose-tinted glasses have slipped back down onto my nose!

That would again suggest to me that Sosandar could trade profitably at the plc level by year-end but for the missing figures for cash: we don’t know how much of the IPO money is left. The fact that we are not told makes me think that they are pretty close to having spent it. What on? Marketing?

We are told that gross margins improved to 55% (as against 49% at the full year) but that doesn’t really help: how much have they spent on marketing? In the FY18 trading update we were told that:

The cost of acquiring customers has shown improvement and halved over the last six months

This time we are told of increasing efficiency of the Company's customer acquisition activities across multiple channels. That’s not quite the same, is it? Anyway, had the cost per customer acquired halved, or had they halved the amount spent overall back in May? I fancy it was the former.

So has customer acquisition wiped out the bank account? Was that the need for a £3 million placing at a whopping discount to the prevailing share price? Or did the company just see a black hole some way further into the future and decide to plug it whilst they could (even if at a whopping discount)? We shall find out when the interims are released (before Christmas, and I hope far sooner). They’ll have to tell us eventually, so why not now?

On a happier note, we are told that September was, again, a record month – so it doesn’t look to me as though sales growth is slipping just yet. Overall, then, I remain bullish.

So where am I now with Sosandar? I still think the shares are worth hanging on to because the growth could continue at this impressive level for some time to come – and that would see the company posting profits and investors working out PE comparisons with others in the sector. That, I think, would boost the shares markedly. So maybe I should buy more?

But the point of offloading tranches (as I did) was to de-risk my investment. My remaining shares are effectively for free (and I have a nice cash profit on top). Buying more would undo all the good work, and in any case the placing at 32p leaves me with a bitter taste, and the lack of clarity in this week’s trading statement does bother me. This is still a near-startup and I am in the happy position of owning a chunk of shares for free. If it does really well from here I will be happy, but I have already cashed in enough to get well over the gain line.

I still think this company is run by talented individuals, but the advisers...well, the less said the better!

So the result of all this high-brow analysis? Well, call me an old bore: I shall do absolutely nothing.

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