Two months ago I suggested Big Sofa’s (LSE:BST) disappointing results were the cue to take profits at 25p. This morning the company announced a conditional placing to raise £1.4million net at 18.5p per share. This news is unlikely to go down well with anyone who bought Big Sofa this summer, but the company’s decreasing cash position was well sign-posted. Moderately well known share-blogger Tom Winnifrith blogged that ValueTheMarkets was “deceiving” private investors with its bearish stance. Today’s placement vindicates our position. It also gives us an opportunity to revisit the stock as a potential buy.
The Big Sofa story has not unfolded as it was meant to. Despite CEO Simon Liddington’s claim this morning that the company has made “exceptional progress” since listing, the 18.5p placement price suggests the market feels otherwise. On the day Big Sofa came to market its share price immediately rose above 20p. The stock hasn’t really traded much below that level since. It certainly hasn’t been as low as 18.5p. That Big Sofa listed at 17p, further heightens the sense the company’s progress this year hasn’t been that satisfactory.
There have been other issues with the company too.
One of the big issues facing Big Sofa has been its lack of substantial news. The headline grabbing partnerships with Unilver, IPSOS and Procter & Gamble have been light on detail about what these relationships have been yielding financially. There should be potential there, undoubtedly, but whether enough to justify the market cap has always been the question. Now that Big Sofa’s board has valued the business at 18.5p a share we perhaps have a clearer idea of where true value might lie.
For investors interested in Big Sofa, the risk has always been the company’s cash position. In the first half Big Sofa embarked on an aggressive expansion drive in the US, but on December 31 2016 it only had £2.5million of cash and cash equivalents to fund this. This wasn’t great, considering the company had just raised £6.1million two weeks before. Factoring in the pre-expansion drive running costs of £300,000 a month and it seemed probable Big Sofa would need to break out the begging bowl again before the end of 2017.
Now that this has happened, how much confidence can we draw from the £1.4million raised?
It all depends on what insider participation in the placement genuinely means. It might be a blessing or a curse. Either insiders are taking the opportunity to load up on stock before a stream of good news or something nasty is lurking around the corner and the company got this fundraising away at this level while it could.
On balance it seems unlikely a nasty shock is around the corner. This morning’s RNS is categorical that non-executive directors intend to participate in the placing to the tune of £210,000 cash AND have agreed to be paid in shares for accrued and future fees. This doesn’t look like a corporate sleight of hand, whereby the non-executive directors’ participation in the placement simply means they write off their accruals. The RNS plainly says they will “additionally” take accrued and future fees in stock.
If Big Sofa were holed below the water line it would make no sense for the non-execs to throw an additional £210,000 into the company. These are not stupid or inexperienced people. Their cash investment should reflect their confidence in the company delivering its long-awaited promise. Even if this isn’t the case, at the very least we should now expect a good old-fashioned promote of Big Sofa’s stock to ensure the other placement participants make a good turn. No matter how distasteful this might be, this is how the game works and the trick it to position yourself on the right side of it.
As for what to expect now, it seems unlikely that Big Sofa’s interims will be particularly impressive. The company has so far only announced figures for one of its contract lines (with Procter & Gamble for “£500,000 worth of proposals submitted with £190,000 already commissioned in Q2”) and even those numbers won’t exactly set the world on fire.
However, accompanying the Interims expect to read many bullish forward-looking statements. Today’s £1.4million fundraise should remove any concerns about Big Sofa’s cash position, so on that basis alone buying the stock at 19.5p looks like a reasonably secure bet.
The author of this article owns shares in Big Sofa