As a rule, it’s prudent for investors to avoid early-stage lossmaking companies. Far more of them disappoint than deliver the stellar returns investors had hoped for. As such, I have to see pretty rare and compelling reasons to consider buying shares in a business at the lossmaking stage of its development.
I see such reasons in the case of Sirius Minerals (LSE: SXX), which is currently pre-revenue, and Redt Energy (LSE: RED), which is generating revenue but not yet profit.
Unique investment proposition
Sirius Minerals represents a unique investment proposition. It’s sitting on what we’re told is the world’s largest known high-grade polyhalite deposit, right under the North Yorks Moors national park. The company’s development of it will be of significant national importance, in terms of jobs and GDP, with an expected mine life of 100 years.
Management has negotiated multiple planning permissions, raised funds and is now in the early stages of construction. First production is targeted for 2021, with full volume of 20m tonnes per year being reached in 2027.
Valuation
When I last ran the rule over the company, I came up with a valuation for 2027 based on what I thought were reasonable assumptions: revenue of $3bn on polyhalite at $150 per tonne (about the price at which the company’s current offtake agreements have been struck), an EBITDA margin of 78%, a net debt/EBITDA ratio of around two, an enterprise value/EBITDA multiple of 10 and a guesstimate of 5.6bn shares in issue (compared with 4.5bn today).
My calculations produced a market cap of £15.2bn and a share price of 271p (compared with £1.15bn and 25.8p today). However, due to a royalty agreement in the financing package, my revenue projection needs to be revised down to just under $2.9bn. The exchange rate has also moved from $1.25/£1 to $1.34/£1. As a result, my projected market cap and share price fall to £13.5bn and 241p. Nevertheless, the indicative more-than-ninefold increase in the share price in 10 years strikes me as still attractive for this unique project versus the risks.
Small-cap with substance
Shares of energy storage firm Redt Energy are trading 2.4% higher as I’m writing, after the company released its half-year results today. This AIM-listed stock has a share price of 10.75p and market cap of £70.3m.
It may not have the unique features of Sirius but it does have valuable patented technology. This, combined with low maintenance requirements, “delivers industry-leading lowest levelised cost of storage and total cost of ownership results.”
Promising growth prospects
Today’s results show there’s clear demand for the company’s products, with orders for its units increasing 220% over the last six months alongside a 78% increase in production and deployments. It’s also at the final stages of customer selection on €16.5m worth of units and has an active customer pipeline of €323m.
First-half revenue of €4.5m is forecast to rise to €12.5m for the full year, followed by €37.4m in 2018 and €71.4m in 2019. This would see a rating of 6.4 times sales fall rapidly to 2.1 and then 1.1. The company is anticipated to post a maiden profit in 2019 and trades on 10.8 times that year’s forecast earnings, while current cash of €13.2m and no borrowings puts it on a solid financial footing.
While there’s no getting away from the general risks of investing in smaller companies, Redt is a business I’d consider buying a small slice of.
