At the time, the data security firm which specialises in data erasure and computer reuse, said a number of factors (including the slippage of some big contracts) had put pressure on its cash position — net debt was revised to £5.5m, and the company reckoned it needed £4m “over the coming weeks” to prop up its working capital. A placing which raised approximately £9.45m was the result.

Then on Thursday we had another trading update, revealing a further hole in Blancco’s finances. That led to a 20% crash, and as I write the shares are at 118.5p.

This time we hear that “cash flow and net cash are below market expectations due to the non-payment of £3.5m of receivables, the majority undertaken in the prior year“. That’s led to a charge of £2.2m.

An awakening

The company has apparently had a bit of a lightbulb moment, speaking of “the group’s intention to apply a more prudent approach to revenue and income recognition on this type of contract in the future“.

So, wait a minute… it’s not until the fan gets heavily soiled that a company with prior cash flow problems realises that being prudent when recognising revenue might actually be a good idea?

At this stage I was going to look at Blancco’s fundamentals, but that would be pointless right now when I’m shocked by its apparent inability to see cash flow problems promptly.

A company that suddenly realises it needs urgent cash within weeks to keep going, and still does’t recognise the inadequacy of its income recognition policy until several months later… well, that’s not a company to which I would trust a penny of my investment cash, whatever the ratios say.

Losing the game?

Today’s antics from Blancco reminded me of that other spectacular recent fall, Game Digital (LSE: GMD). Game’s shares had been sliding for months when a trading update on 30 June sent them over a cliff — a 67% crash over the past 12 months to today’s 19.5p. 

Game’s fundamentals actually look decent, with forecasts suggesting a P/E as low as 6.6 for the year ending July 2017 — although that’s a year in which earnings per share are expected to plummet by 80%. The forecast dividend of 1.3p would provide a yield of 6.2%, but in the light of its slashing from 14.7p to 3.4p in in 2016, it’s not something I’m going to put much faith in. 

Even a mooted 55% EPS recovery in 2018 does not attract me to the shares, and I’ll tell you why.

Dying business

The problem I see is that the retailing of binary digits through actual bricks and mortar stores looks to be an increasingly bad idea — the same way online distribution of music has killed many a retailer of CDs (or “record shops” as I still like to think of them).

My ISP has just upped my broadband to a nominal 150Mbps (and unlike many, it actually works out better than that — testing it showed 164Mbps). Why would I want to go all the way to a shop to buy a physical plastic thing when I can have massive digital content downloaded in minutes?

These two shares are beyond the end of my bargepole.

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This unsurprisingly turned out to be disastrous for the share price, which was off over 25% in early trading. But now that this fast-growing small-cap is more attractively priced at 28 times trailing earnings, is now a great time to begin a position?

On one hand, the company’s two core segments are growing rapidly. Data erasure, which scrubs companies’ IT assets of all data to comply with regulatory requirements, grew sales 36% year-on-year in constant currency terms. And the diagnostics division, which troubleshoots IT problems with companies’ mobile devices, increased sales 189% during the period. Together, this meant sales for Q3 were up a whopping 48% year-on-year.

However, there are warning signs that have me nervous. The largest is that the company is still firmly in start-up mode, which means opening new offices, hiring new employees and generally burning through cash. There is nothing inherently wrong with this. But if the company is having problems accurately projecting costs associated with previous M&A activities and judging when customers will actually pay (the main causes of the cash flow shortfall), it does not speak well of how its expansion is being handled.

This is especially worrying with AIM-listed tech companies, which have a long history of failing minority shareholders. Blancco’s business appears to be moving along nicely, but the company’s inability to forecast cash flow, rising debt and questions over where it will raise the necessary £4m are red flags that would stop me from investing at this point.

Similar business, safer choice 

That said, a safer option in a similar market does exist in the form of Restore (LSE: RST). The company is best known for its document management services, which allows law firms, hospitals, accountants and the like to securely store critical paper documents in its facilities.

The company is now the biggest provider of these services in the UK, second largest provider of shredding services, and is also a major player in the data erasure and relocation businesses. Offering this array of services is winning over new clients at a rapid clip and together with acquisitions sent sales rising 41% year-on-year in 2016.

EBITDA and statutory profits grew in line with this increase and look set to rise further in the coming years as the company cuts costs from acquisitions and bundles more services. With net debt rising to 2.46 times EBITDA at year-end due to acquisitions, the company will likely avoid big acquisitions for the time being. But with impressive cash flow, this level of leverage shouldn’t be a worry in the long term.

Restore’s shares are priced for growth at 19.1 times forward earnings, but with a stellar record of growing sustainably, a market leading position in its core business and increasing regulatory-mandated demand for its services make the company one to watch.

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The firm’s shares have been drifting lower for most of this year, and this morning’s fall to around 161p means that Regenersis shares are now worth 46% less than one year ago.

Is Regenersis a falling knife that’s best avoided, or does the firm offer good value at the current price?

What’s gone wrong?

Regenersis says that as part of a process of consolidation, one of its larger clients will shift its European business to another supplier next year.

This is a significant loss for the firm’s Depot Solutions business, which provides outsourced electronic repair and refurbishment facilities to major manufacturers and retailers.

In this morning’s profit warning, the firm says that while results for the year ending 30 June 2015 will be unaffected, profit growth in 2015/16 will now be “modest”.

How will this affect profits?

The latest consensus forecasts for Regenersis (published before today) show a 21% rise in earnings per share for 2016.

In my view, today’s update suggests that most of this expected growth will be wiped out by poor performance from the Depot Solutions, leaving forecast profits broadly in-line with 2014/15 results.

That’s not necessarily a disaster. Earnings per share for the year just ended are expected to be 17.5p, implying a P/E of just 9.4 after today’s fall. The firm is expected to pay a dividend of 5p per share, giving a yield of 3%.

The good news

Depot Solutions accounted for almost half of Regenersis profits during the first half of the year. The remaining 52% came from the firm’s Advanced Solutions division.

This appears to offer much more potential. Regenersis reported an adjusted operating margin of 20.0% for the Advanced Solutions division during the first half of last year, compared to just 5.2% for Depot Solutions.

Regenersis expects “strong growth” in the Advanced Solutions division this year, Profits should also be helped by growth from a recent acquisition, Blancco, which provides data erasure services for businesses.

This is apparently a profitable business. Blancco’s adjusted operating profit rose by 45% during its first full year as part of Regenersis, according to today’s update.

The big risk?

I’m beginning to think that Regenersis could be an interesting contrarian buy, but I do have some concerns.

Regenersis raised £100m in a placing in March 2014 to fund the acquisition of Blancco and repay debt. At the time, the firm said that it believes opportunities for growth remained strong.

In today’s update, Regenersis appeared to do something of a U-turn on this statement, saying that in 2016 the board will “focus on actions to maximize shareholder value”.

This suggests to me that the firm is not expecting much in the way of growth, so will try to keep shareholders happy by hiking the dividend or perhaps disposing of some non-core assets.

Buy or sell?

In my view, Regenersis looks reasonably priced following today’s fall. However, there is a risk that more profit warnings could follow today’s announcement.

I plan to do some further research before deciding whether the shares rate as a buy.

The post Is Regenersis PLC A Buy After Today’s 20% Drop? appeared first on The Motley Fool UK.

Regenersis

Today’s declines take Regenersis’ total fall this week to around 33%, wiping nearly £100m off the company’s market capitalisation. Of course, these declines can be traced to Tuesday’s worse than expected full-year results, in which the company revealed that fiscal 2014 profit had fallen sharply, despite higher revenues. 

Pre-tax profit fell to £2.9m, from £5.7m as reported last year. Net income fell to £3.0m, from £4.7m as reported last year. Earnings per share halved from 10.5p to 5.4p. 

However, these results were impacted by one-off restructuring and acquisition costs. The company also undertook a placing during the year, which impacted earnings per share figures. The placing raised £100m for the acquisition of Blancco Oy Limited.

Adjusting for exceptional items and the placing, Regenersis’ earnings per share would have come in at 18.2p for the period, up 8.3% year on year. In constant currency, the group’s revenue expanded by 18%. 

Alongside results, management announced a dividend increase of 60%. 

A good time to buy

Looking at yesterday’s results, I can’t help but think that the market has overacted to Regenersis’ lower level of profitability.

That being said, looking at Regenersis’ historic valuation, it’s easy to see why investors have rushed to dump the company’s shares. Indeed, before Tuesday’s results the company was trading at a historic P/E ratio of around 19.3, which did not leave much room for error. 

Nevertheless, after dropping by more than a third, Regenersis’ shares now appear to be attractively priced. For example, the company currently trades at a forward P/E of 12.3 and despite headwinds from unfavourable currency movements, management remains confident that the company can continue to hit growth targets. 

Management upbeat

It’s obvious that Regenersis is chasing growth. Alongside Tuesday’s results, Matthew Peacock, Executive Chairman of Regenersis released a statement saying that:

 “Overall the year just ended was transformative in terms of the shape of the Group and its prospects for the future. The Group has become an exciting Advanced Solutions-led business growing via organic progress and M&A…I am looking forward to further expanding a number of strong performing divisions (organically and via bolt-on M&A) which are demonstrating a proven track record of growth.”

So, it would appear as if shareholders have got plenty to look forward to as the company bolts-on growth. Moreover, Regenersis has plenty of financial headroom to pursue this strategy. The company has a net cash position of around £20m with almost no borrowing.

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