Have shorters had a field day with Toople? (TOOP)

Investors in UK telecoms provider Toople (LSE:TOOP) have endured something of a rollercoaster ride recently, with shares soaring by around 300pc to nearly 1p before falling to their current 0.35p over a matter of days. A “major contract win”, followed by some extraordinary volume and then a heavily discounted placing is the sort of thing you often see on AIM, so for this to have happened on the LSE’s Standard List is notable. It will be interesting to watch how this plays out in the coming months.

The turbulence started on 29 August when the company announced its ‘major contract win’ with a UK reseller, prompting large trading volumes that led shares to hit highs of 0.92p. Less than two weeks later things took a major step in the wrong direction when Toople revealed a £2.2m placing to fund additional acquisitions. At a placing price of 0.3p a share, the raise was carried out at a hefty 61pc discount to the firm’s market value in the previous day’s trading. Unsurprisingly, shares fell by 42pc to their current 0.35p as a result.

An objective look at this recent trading pattern suggests that conditions were primed for a significant short to build in Toople’s stock. Those that were able to make this trade have had a field day while private investors have once again been left to pay the price.

Red flag

As mentioned, the trigger for the initial rise in Toople’s share was the major deal, which chief executive Andy Hollingworth described as a ‘great win’ for the business. However, while the deal may have looked like a ‘great win’ on the surface, it did not come without significant health warnings. In particular, a line detailing the terms of the deal read: ‘The contract duration is for an initial three years and is expected to deliver at least £3.5m in additional revenues to the company spread over that period. It is expected to be accretive to monthly revenues after an initial six-month period.’ 

Here, the terms surrounding the headline £3.5m figure become more complicated, with Toople essentially carrying out what looks like a six-month trial period before it begins to see any revenues. Furthermore, the use of ‘expected’ implies that income after this point is not guaranteed.

Regardless, the promise of £3.5m worth of revenues reeled in investors en masse, and a total of c.365m shares traded between 29 August, the date of the announcement, and 10 September, the day before the placing. With Toople’s total issued share capital coming in at c.204m, according to the Financial Times, these figures suggest that more than 150pc of the company’s outstanding shares exchanged hands over the period.

So, given that it is highly unlikely that every single Toople shareholder would have sold their stake, what could have happened behind the scenes?

A quick look at Toople’s financials at the time of the deal would have shown a last-seen cash balance of £374,000 as of 31 March this year. With no placings occurring since, it would have seemed likely that the firm would need to raise money imminently to stay afloat, making it a good target for shorting. The spike in share price and concurrent volume would have presented speculators with the chance to build a decent size short position.

By way of example, if 100m Toople shares were sold short at an average of 0.6p a share, one single investor could have built up a total short position of £600,000. If this investor then went on to take part in the placing, buying 100m shares at 0.3p each, they will have locked in a £300k profit in just a matter of days. Unfortunately, for every short seller who has locked in a quick gain, there will be many other investors, likely in the retail market, who suffer equivalent losses

It takes two to make a market

There is not anything wrong with shorting per say. Despite “shorters” being the obvious bogeymen in the retail investment community it takes two to make a market. In this instance anyone buying Toople stock as it rose sharply was taking a big risk. The firm did slap health warnings on its “major contract win”. While the speed at which the company suddenly was able to raise £2,2m might seem surprising, the company is now well funded. It will now be interesting to see what happens with the “major contract win” over the coming months.

 

Authors

Daniel Flynn & Ben Turney

Disclosure

The authors do not hold any positions in the company mentioned in this piece.

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