Castleton Technology (LSE: CTP) and Churchill Mining (LSE: CHL) have rallied hard since the end of last week. Of the two, Churchill is my favourite bet. Its stock price has almost doubled in value over the past five days, closing at 44p on Monday, some 26% below its 52-week high of 59p on Thursday.
Does that signal upside?
If so, bear in mind that its current valuation also signals the likelihood of high volatility in weeks ahead.
Just A Fraction Of $1.5bn Would Do!
Unfortunately, its fair value is hard to gauge because its trailing income statements, cash flow statements and balance sheets provide little information with regard to its track record, while estimates for future revenues and profitability should be regarded as highly uncertain at present time.
So, we are almost blind on financials: not only any possible guidance is premature, but it hinges merely on external factors. We know now that the biggest threat associated to the investment case is political risk in Indonesia, a country that historically hasn’t been kind with institutional investors and foreign firms.
What’s encouraging is that Churchill managed to raise £850,000 through a placing of 8.5m new ordinary shares at a price of 10p per share less than a month ago, proceeds of which will be used to reach a settlement with the government of Indonesia. The matter is pretty serious, and concerns one of the world’s biggest coal reserves — the “East Kalimantan coal project”, which is valued by Churchill at $1.5bn.
Assuming Churchill fetches half of that amount, its current asset base would sky-rocket to half a billion pounds, and its stock price will most likely go through the roof — its market cap currently stands at £48m, which says a lot about the risk involved.
Talks are ongoing, but Indonesia has shown in the past that such negotiations could drag for years. The government has so far dropped allegations of fraud against Churchill, but uncertainty remains as wrongdoings of Churchill’s partners in the project could reportedly weigh on the outcome.
One element I like a lot is that the miner also announced last month the “issuance of warrants over ordinary shares on the basis of one warrant for every two placing shares exercisable at a price of 15p per ordinary share and expiring on 30 June 2018“. This signals a certain degree of confidence in the outcome of the proceedings — confidence and nerves of steel are what you need to invest in it, of course.
Castleton Technology Grows
With a tiny £33m market cap, Castleton is a bet on how quickly the company will grow by snapping up certain assets that target the public and not-for-profit sectors. “Nearly a third of all the social housing associations in the UK are now Castleton customers,” chief executive Ian Smith pointed out in the wake of recent deals in the space.
Its stock changes hands at 3.11p right now, which is close to its 52-week high.
Over the last 12 months, Castleton has made good progress. Its management team is building the company by seeking inorganic growth, which makes a lot of sense in the software support services world, particularly for listed companies.
Last week, it announced to have acquired Impact Applications and Brixx Solutions for a total consideration of £10m, which isn’t small change for Castleton — which, however, seems to have financing options.
This services firm, formerly known as Redstone, has changed a lot in recent years and is now managing expectations, drawing the attention of retail investors, while focusing on more profitable operations in its assets portfolio. If anything, it has a huge amount of shares outstanding, which may not be such a good thing if things do not go according to plan.
That's the inevitable price to pay to record outstanding returns!
But if you are willing to take a calculated risk, you should consider several alternative opportunities that look like a bargain right now, and offer more reassurance than Castleton and Churchill, at least financially. Their names are disclosed here, and are included in a Motley Fool value report that is FREE and comes without further obligations for a limited amount of time -- you are only one click away from Your 10 Step Guide To Making A Million In The Market.
Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.