Friday 9 September 2016

Starcom Systems Cash Position Explained

Disclaimer: I don't have a license to distribute financial advice and therefore this should be viewed as being for entertainment purposes only.


Starcom Cash Position Explained:


It's been notable that since the company's interim results this week there has been a lot of question about the company's cash position. I hope to be able to clarify this in this short blog:




On the face of it, cash of $46,000 admittedly doesn't look too appealing, however when you dig further into the background the apparent lack of a need for cash becomes clearer.


SAS revenues in the first half year came to $845,000 (this is effectively an electronic online data management platform for tracking systems) and now the system is in place I am told this is pure profit on the bottom line - these revenues are expected to increase in the second half of the year and are gathered monthly.


These latest results cover the six month period ending in June, so if we assume that they don't grow their SAS revenues (to keep the maths simple) then in the period since the end of June they will have taken in a further $281,666 over July and August:

$845,000/6 =$140,833

$140,833*2 =$281,666


Although remember in your own calculations that they are expecting SAS revenue to grow in the second half of the year, so you can probably increase this on paper.


Now the company also stated that they used net cash of $200,000 in the half year, so if we take this monthly figure ($200,000/6) multiplied by two to cover the months of July and August away then we have an effective cash balance of:


$281,666-$66,666

= $215,000


Furthermore, you have to add on to this figure extra sales referred to in the results:

"The new version of the Watchlock known as Watchlock Pro was effectively only launched into the market during July 2016, yet some sales have already been booked following the launch." 


Realistically, factoring in a small level of SAS growth and say a modest $25,000 of sales since the results takes us to a cash position of ~$250,000-300,000, in my opinion.



Food for thought...

The Masked Stock Trader

Wednesday 7 September 2016

Starcom Systems Interim Results (07/09/2016)

Disclaimer: I don’t have a licence to distribute financial advice and thus the following work should be viewed as being for entertainment purposes only.




Starcom Interim Results (07/09/2016)


This post is a summary of the last set of interim results for Starcom Systems, which can be found here:


http://www.lse.co.uk/share-regulatory-news.asp?shareprice=STAR&ArticleCode=7zpp0hjo&ArticleHeadline=Interim_Results


Apologies if this is slightly garbled and if I’ve accidentally repeated sections. The coloured bullet points are all taken directly from the RNS above, which I would encourage people to read fully. 



Positives: 

Cash requirements only ~$200,000 for the first half of the year, with much of this likely being down to the:


- Major savings of 26% in general and administrative expenses were achieved


SAS revenues are very strong (in the weak half of the year too):


- The first half results include $845,000 of SAS revenues which continue to show growth. These SAS revenues were not at their full potential in the first half due to customer delays in activating the software. We believe this will be rectified in the second half, resulting in further growth in SAS revenues. 


Decreased operating loss to $440,000 (~18% of revenue) from $500,000 in the previous half year.



Negatives:

The only negatives here are that margins and revenues were both slightly down relative to the first half of 2015:


- Revenue for the period of $2.5m (H1 2015: $2.6m)

- Gross margin of 38% (FY 2015; 40% and H1 2015:44%)


Regardless of this, regarding their gross margin the company commented that:


- We also expect the gross margin to improve as SAS revenues normalise. 


Moreover, the underlying effect of this has clearly been offset with cost reductions elsewhere in the overall business pipeline, as we can see from the loss reduction from $691,000 to $613,000:


- Loss for the period after tax reduced to $613,000 (H1 2015: $691,000)

Also, it looks as though the Kenyan deal has been slower to implement than expected, delaying some of the revenue generated via SAS, but the company expects this to:

- “change during the second half of the year”

Assuming this happens, we can expect (as I talk bout more below) for revenue to be backloaded in the year, meaning their next results should look very nice.



Market Maker’s Positioning:


This section might be better understood with a look at this brief explanation/example of a market maker’s job:




In the month prior to these results being released, I’d been of the opinion that market makers had positioned their proprietary trading desks somewhere between flat and long Starcom stock. Being able to almost always sell in volumes multiple times above Normal Market Size (NMS) at premiums to the advertised bid price made me suspect that they were positioning this way.

When it then became apparent that the offer was almost always very thin (200,000 shares maximum on a normal day) prior to a negotiated trade, I feel that on a balance of probabilities the market makers had stock held long in Starcom.

In the last three or four days however, I suspect that much of this long stock was de-risked to create a flat book prior to the interim results released today (hence the block selling some spotted at certain points of higher volume hitting the offer prices in the market).

After the somewhat inevitable initial drop all AIM companies seem to get on their results day, we saw decent sized buys appear (initially sporadically) that helped to even out the early selling from loose holders. So far the market has since then been pretty balanced for the rest of the day, although again, it was noticeable that the shares on offer were limited so sub 400,000 and by the end of the day more large buyers had pulled us back into the strong support zone between 3.25/3.50p. 

Moving forwards, I think that it’s likely that market makers would look to reposition themselves net long again on Starcom stock for a few reasons:

  • The free float is quite small and there are a lot of sticky holders, meaning that a small amount of buying shift the stock significantly.
  • The outlook discussed below is very positive regarding the second half of the year, so on expectations trading volumes leading in to that period should be increased.
  • One of the stickier holders is almost always topping up on dip, so momentum is generally upwards.


Fundamental Outlook/Analysis:

On balance, I would say that there are significantly more positives going forwards than negatives. in particular, the company’s own forward (implied) guidance regarding the second half of the year is particularly useful for current investors:


  • Strong sales pipeline for H2 
  • “…there are a number of sales opportunities being pursued, including following the launch of Watchlock Pro, which are expected to lead to a significant improvement in the second half of the year."
  • As in previous years, we expect most of the second half revenues to fall into the fourth quarter.
  • There are some fairly significant sales opportunities being examined both in the US and elsewhere
  • we remain cautiously confident that second half revenues should comfortably exceed the first half and therefore that annual revenues will exceed last year’s
  • We have recently signed a small trial order under this system through our Miami office and are hopeful that larger orders will follow. 
  • We have also received very positive interest from distributors in Asia and South America.
  • We have now achieved recognition by a few major insurers whereby, in the case of valuable cargoes being shipped in containers, the cost of the Tetis is effectively offset by a waiver issued by the insurance company


Even though the gross margin has fallen from 44% to 38% compared to the first half of 2015, in this line of business, with the current cost levels being so low, you only need a small percentage extra business for that to have a significant impact on your overall earnings and profitability.

Also, with the operating loss being only 18% of their total revenues in the period, when you project revenue forwards and adjust for a stronger second half there’s quite a good chance of the company (in my opinion) generating a profit by the full yearly results.

Furthermore, with a company like Starcom in the growth phase of its business model, the above excerpts from the RNS suggest that a reasonable contract from a major would have a very significant impact on their underlying profitability. Much of this is (in my opinion) still likely to be generated in part from their tie ups with majors like Assa Abloy, Cambridge Security Seals or SATO.



I'll likely add to this piece as I continue my research here, so keep an eye out for changes (although i expect the majority is on here now).


For further fundamental reading and detail on the above business I suggest people look at these: