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Sosandar – I might be in a minority of one, but….

By Nigel Somerville | Saturday 24 November 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 think we all agree that AIM-listed Sosandar (SOS) is a “good” rather than a “bad” company here on ShareProphets, it is just the valuation which some (quite understandably) question. The company filed its interims on Wednesday and I have to say that overall I was pretty pleased, although the cashburn might be a worry.

Tom Winnifrith shared his thoughts in his Bearcast HERE and although he likes the company the valuation, to him, is crackers. On the face of it burning through £2 million of cash in six months, clocking up a loss of about the same when pushing sales up by around 80% since H2 doesn’t read all that well - and no sign yet of being profitable either. At the end of H1 net current assets were around £2.7 million, and the company did a discounted placing to bring in an extra £3 million. On that basis, bearing in mind we are about two month’s cashburn on from then, a market capitalisation of £46 million might indeed seem a bit rich.

But I’m not so sure it is quite as crackers as all that. My original assumptions were that operational costs were running at about half of revenue. During H1 they came down a shade to around 45%. A small step, but in the right direction. Admin costs went a bit higher from c. £2.5 million in H2 to £3 million this time. As a proportion of sales, they were running at 161%, but in H2 the same numbers come out at 253% so again I think there is clear improvement.

As for the placing, £3 million of extra cash is a welcome bonus, although loyal shareholders might have a few reservations about a discounted placing at 32p when house broker Shore had just put a price target for fair value at 50p. It is clear to me that net current assets of £2.7 million as at H1 would have been somewhat threadbare at year-end so raising cash when the company did seems to have been very sensible – especially given the crabby market we have now. Who knows what they would have got if they had waited until, say, April to top up the coffers in the face of a calamitous Brexit and a bear market.

Meanwhile those sales keep on ramping up. We already knew that sales were up at around £1.84 million, which meant Q2 was about £1 million – nicely up on Q1, especially allowing for a dead August. The interims told us that October saw another record in sales and it seems that winter-wear sales have been “very promising” thus far. That’s all good and I remain very optimistic that sales will continue to rise sharply from here.

Guidance from those who know better than me is that August and December are fairly dead months, so my best-case scenario is for Q3 sales of around £1.7 million. Q4, with a full three months of trading, could be really strong – my maths says as much as £4 million but I don’t see that happening, so I’m going for a still highly optimistic £3 million. Of course, that is my best case: there is plenty of uncertainty out there in the market so I’d take that with a large pinch of salt.

As for profits, the company has just racked up operational costs of £0.8 million and admin costs of £3 million on sales of £1.8 million in six months. We are some way, then, from a bottom-line profit! If we hit £3 million of sales in Q4, I reckon operational costs will be around £1.2 million which leaves £1.8 million for admin costs over the last three months of the year if the company is to move into profit before year-end. Is that achievable? I doubt it, but I don’t think they will be all that far off. Certainly I would expect Sosandar to be in profit during its next financial year - the house broker reckons by the end of that year but I’m going for a surprise for H1.

The problem is that it is all a skill-set for Mystic Meg and guess work for the rest of us. But having bagged a decent profit from my investment already, I’m hanging on to the remaining tranche for now. I am still looking for 50p a share before I sell a bit more and with the shares closing a strong week at 39.8p when the rest of the market was in melt-down I’m happy to sit and wait. Longer term, I am still of the view that the shares could rise very sharply from here and I don’t want to miss out.

The shares may be expensive by all sensible measures, but some people are willing to pay more for the growth. I hope they are right!

So rather boringly, I still mark Sosandar as a hold – no flip-flop from me!

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