Top fund manager Neil Woodford has just ramped up his stakes in RM2 International (LSE: RM2) and Netscientific (LSE: NSCI), which seems like a good reason to take a closer look at these potential multi-baggers.
The two companies are in very different businesses, but have some things in common:
- Currently loss-making, but huge potential
- Fundraisings at/near all-time lows announced this week
- Woodford taking the opportunity to significantly increase his investments
RM2 International listed on AIM in January 2014, raising £137m at 88p a share. Woodford soon bought into the company with the launch of his CF Woodford Equity Income Fund in the summer of last year, notifying a 7.5% stake in June. By the end of August this year, his holding was up to over 21%.
A placing by RM2 announced this week to raise £30m is at an all-time low share price of 40p. Woodford has subscribed for shares in the placing, which will take his interest to 27% of the enlarged share capital. Supporters like Woodford are averaging down from higher prices, but new investors today are being offered a low entry point, with the shares currently trading in the market at 43p.
RM2 is seeking to establish “a disruptive presence in global pallet supply and improve the supply chain of manufacturing and distribution businesses through the effective and efficient use and management of composite pallets”. The company has some heavyweight non-executive directors on board, including Paul Walsh (chief executive of Diageo from 2000 to 2013) and Stuart Rose (boss of Marks & Spencer from 2004 to 2010).
RM2 is not only currently loss-making ($25m over the last six months), but also has virtually no revenue at this stage. This week’s placing follows hot on the heels of a setback. The company had expected a substantial upswing in production and revenue to begin in Q3 this year and accelerate through Q4. However, feedback from customers has led management to drop a friction coating method for pallets in favour of a new gel-based system, which has delayed production and revenue targets to 2016.
My problem with RM2 is not that it’s had a hiccup — to be expected with a developing business — but that I haven’t been able to find any detail on the long-term revenue opportunity for the company and the kind of margins it hopes to make. However, it’s very likely Woodford has a far better idea of RM2’s prospects than me!
Netscientific, which funds and builds companies in the area of biomedical and healthcare technology, listed on AIM in September 2013, raising £30m at 160p a share. Again, the CF Woodford Equity Income Fund acquired an initial stake in this one last year — a 4.4% holding notified on 4 July, which quickly went up to 10% a week later. The most recent disclosure came in June this year, at which point Woodford’s stake had risen to 29.4%.
Netscientific’s shares reached a high of over 200p as recently as July. Today the company has announced a placing to raise £20m at 120p (10p above the all-time low), although you’ll currently have to pay 132p in the market. Woodford has subscribed for shares in the placing that will take his stake in Netscientific to a whopping 45.3% — a level which requires a waiver of rules that oblige him to make a takeover offer for the company!
Netscientific hasn’t had the kind of setback suffered by RM2, although it has been through a strategy review and operational management reorganisation. The purpose of the fundraising is to accelerate the development of the group’s two lead portfolio companies “towards significant value inflection milestones and exits”.
Woodford only owns one pallets business, but he has a number of similar-type investment companies to Netscientific in his portfolios, as well as numerous individual early-stage businesses in the same general area. So, while he’s clearly very keen on Netscientific, he really spreads his bets widely in this space, which is something well worth bearing in mind.
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G A Chester 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.