Advanced materials group Versarien (LSE: VRS) probably wasn’t on the radar of many investors before its shares soared from 20p to 80p between 1 November and 8 December. During these weeks the firm announced partnerships with a “global consumer goods company” and a “global chemical major,” as well as ongoing negotiations with a number of other “multinational companies” in diverse sectors.
Could Versarien be a millionaire-maker stock? Or has the market got overexcited?
It was floated on AIM in 2013, raising £3m at 12.25p a share. With 83.1m shares in issue, its market capitalisation was £10.2m. The number of shares has increased to 148.4m, largely as a result of four further fundraisings (totalling £11m), and shares issued in connection with acquisitions. At the recent peak of 80p, the market cap was near to £120m.
Investors need to tread carefully with companies on London’s lightly regulated junior market but I’ve found no glaring ‘red flags’ in Versarien’s accounts or in its directors’ backgrounds, which is a good start.
Chief executive Neill Ricketts and finance director Christopher Leigh were both previously with another AIM-listed firm, Elektron Technology. Ricketts was a divisional managing director, who, according to Elektron, “successfully turned around a number of underperforming businesses.” He departed when the group changed its strategic focus and divisional structure, as did Leigh, who had been Elektron’s finance director for 18 years.
From unpromising to exciting
At the time of its admission to AIM, Versarien, which had no revenue in its prior financial year, acquired a subsidiary of Elektron from the division Ricketts had managed. Some details of this and further acquisitions Versarien has made are shown in the table below.
|Acquired company||Date of acquisition||Price of acquisition (£m)||Revenue in year prior to acquisition (£m)|
|Total Carbide||Jun 2013||2.28||3.84|
|2-DTech (85%)||May 2014||0.44||0 or negligible|
|Custom Systems||Feb 2015||0.21||3.60|
|AAC Cyroma||Oct 2016||1.70||4.27|
|Cambridge Graphene (85%)||Jan 2017||0.17||0 or negligible|
Given the total £11.71m of the revenue-generating businesses it has acquired, it’s a little disappointing to find that group revenue for its last financial year (to 31 March) was just £5.93m, on which it made a £2.2m loss. Somewhat unpromising, it has to be said.
However, the aforementioned partnerships with a global consumer goods company and a chemical major relate not to the more mature businesses but to the commercialisation of the production of graphene by 2-DTech, a spin-out from the University of Manchester, which Versarien acquired 85% of for £0.44m.
In its latest half-year results (to 30 September), it reported a jump in revenue to £2.2m in its graphene and plastic products division from just £17,000 in the same period of the prior year. It’s the commercial potential of graphene, as evidenced by the keen interest of diverse multinational companies since the half-year end, which has got investors excited.
What price to pay?
While, some of Versarien’s businesses appear to be fairly humdrum, I believe the commercial opportunity for graphene is genuinely significant. But what price would I be willing to pay to participate in such an opportunity?
My rule of thumb for this type of higher-risk/potential-high-reward proposition is to pay no more than 10 times current sales. Annualising Versarien’s H1 revenue gives £8.76m, so multiplied by 10 gives a market cap of £87.6m or 59p a share. Therefore, I’d rate the stock a ‘buy’ at up to 59p.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.