When I look at penny stocks, I’m always especially minded to ask the first question Warren Buffett and Charlie Munger ask when weighing up a company. Namely, “What could go wrong?”
Peter Bevelin, author of Seeking Wisdom: From Darwin to Munger, has put the ultimate answer in a nutshell: “If a catastrophic outcome is possible or you can’t judge the downside, stay away.”
With this in mind, I’ve asked myself whether I should buy UK penny stock [email protected] Capital (LSE: SYME). I’ll say straight off that I’ve concluded I should avoid it. Here, I’ll explain my reasons for steering clear and also look at the potential upside, if my caution is misconceived.
[email protected] Capital has developed a fintech platform. It aims to bring together companies wishing to raise cash against their inventories with funders willing to supply it. This at a cost that makes a profit for both the funders and [email protected]
The company gained a stock market listing in March 2020. It targeted a first securitisation of inventories via its platform within six months. But, so far, it hasn’t managed to bring together a single deal.
A £227m penny stock
I’ve previously been sceptical about [email protected]’s prospects. For one thing, I’m not convinced the company’s business model is actually viable. And there are a number of other things that concern me.
First, [email protected] was sold to investors on a prospectus showing net assets of £227m — bang in line with its market capitalisation at an issue price of 0.7p a share. However, on its post-listing balance sheet, net assets were less than £1m. Goodwill had been entirely written off.
Waiting for Godot
As well as the repeated delays to a first securitisation of inventories, the publication of this penny stock’s first audited financial statements has been put back and back. First, because the company has twice changed the date of its financial year-end. And second, because it’s simply failed to get the results out by the dates it’s set.
On 19 January, [email protected] told us the results would be “published in April.” On 23 April, it put the date back to “during May.” On 26 May, it said the statements “are being finalised, with publication expected next week” (i.e. during the trading week ending 4 June). And on 4 June, it announced another delay. It said it will publish the results only after it’s secured a new funding facility “expected to be completed in the coming days.“
In view of the net assets carry-on, and the repeated delays to both the first securitisation of inventories and first audited results, [email protected] doesn’t pass my ‘smell test’. I’d want to at least see those audited results before going anywhere near this penny stock. But what if my scepticism is misconceived?
A penny stock high-flier?
[email protected] shares are trading at 0.39p, as I’m writing. At this price, the market capitalisation of the company is £128m.
This may look high for a start-up business, but if the company really has found a way to revolutionise inventory monetisation through its fintech platform, the market opportunity could be vast. [email protected] talks of an addressable market of inventory under management in the $trillions. Not a bad target for a little UK penny stock!
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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.