Sound Energy (LSE:SOU) can be bought at 9.6p in decent volume. After the firm announced a $3m placing at 10p yesterday it looks like placement participants are now flipping the stock. The volume is the most obvious indicator of this, but since Sound paid an eye-watering 10% commission on securing its funds it doesn’t take a genius to figure out the market dynamics currently at play. Even so, although the fundamental argument for buying this troubled company is thin, there could be a viable sentiment trade on offer from this level.
Sound has been one this year’s biggest disappointments. Critics of the firm will say that it was always going to end this way. When the shares peaked at about 94p in February 2017, the business was valued at more than £500m.
As is often the case with these sorts of stocks, hope can dramatically overshoot realistic expectation. In the case of Sound, the company seemed destined to struggle to live up to the wild premium retail investors were prepared to pay for a vehicle that wasn’t even generating any revenue.
The serious money needed to develop Sound’s assets was never going to flow in at that sort of level. The huge NPV figures and resource estimates were a mirage. Without adequate working capital to develop its portfolio, the firm was stuck. And while the market assigned such a massive premium to the company’s stock there was little to no chance of it being able to access the scale of funding it needed.
While the stock promotion of Sound was second to none, it also put the firm in an impossible position.
Those chickens really came home to roost with yesterday’s raise.
That Sound had to pay 10% commission on the deal is strongly suggestive of the weak financial position the business finds itself in. Good deals require less commission because there is more investor appetite to take them up. It’s that simple.
And it gets worse from a fundamental perspective, when you consider Sound’s current market cap is £101m. $3m (before costs) is a paltry sum for a firm that large to raise. It looks very much like a “keep the lights on” sort of deal.
So why might Sound’s shares be a buy at this level?
This is one company that has been bloody good at consistently promoting its stock for a number of years.
We learned in yesterday’s announcement that Sound will use its $2.7m to “strengthen the Company’s cash position whilst the Company continues to explore the marketing of its Eastern Morocco portfolio, which is expected to conclude prior to the end of 2019.”
Whether or not Sound is able to sell its Eastern Morocco portfolio for a worthwhile amount is anyone’s guess. However, the point is that this is irrelevant in the context of the current trade.
Instead, what matters is how well the company is able to promote this sales process to the market.
Since it wasn’t that long ago that investors were falling over themselves to part with their cash at much higher levels, it seems a fairly decent bet we’ll see at least a mild relief rally in the coming months. Expect to see a lot of underwater current holders also doing what they can to push the price higher.
From 9.6p, a 50% gain could be on the cards. As is ever the case with these sorts of stocks, it’s a trade to go easy on and keep nimble with. The fundamental story here looks holed below the water line, but the speculative pump could generate a decent trading profit as we move into H2.