Wednesday 11 January 2017

Dekeloil Research Notes:

NB: I don’t have a licence to distribute financial advice and therefore none of the below should be viewed as a recommendation to buy/sell stock.


General Information:

DekelOil is a low cost producer of palm oil in West Africa, with a market capitalisation of ~£28.5m. 

Feedstock for the Mill comes from several co-operatives and thousands of smallholders, with Dekeloil also owning nearly 1,900 hectares of its own plantations and a world-class nursery with a 1 million seedlings a year capacity. 

Most recently, Dekeloil has acquired the remaining 14.25% of their previously joint owned Ayenouan project, making them the sole 100% owner of the project.

In addition, recent investments have been made in Ayenouan in order to increase the margins of the project by at least 0.5%, increase storage capacity (thus allowing better price hedging) and a reserve boiler to mitigate potential breakdown risks.


Results Overview:

2015 FY (in thousands of Euros)


Revenues: 23,436

Cost of Revenues: (17,998)

Gross Profit: 5,438

General and Administrative: (2,518)

Operating Profit: 2,920

Net Income: 118


For the 2015 Full  year results, it is worth bearing in mind that at that point they only owned 51% of the Ayenouan project, as opposed to the 100% they own now. 

Analysis:

Most importantly for me has been Dekeloil’s full buyout of the Ayenouan project. The third quarter results (of which they had 85% ownership at the time of publication) suggest that revenues and production are set for another record year with Executive Director Lincoln Moore saying: “we remain on course to report another record full year performance in terms of CPO production.”.

Within the backdrop of rising palm oil prices (see chart below) and a now fully developed 100% working interest in the project, the net margin to Dekeloil should significantly increase in the next full set of results, but more importantly in the following quarterly updates, where we should begin to see this feed through into the underlying performance of the company.


Palm Oil Chart:




Moreover, selling produce in euros, they have been not only hedged against the weakened pound, but will be a beneficiary, as they have many administrative costs denominated in pounds sterling. Also now the company is in a state of gross and operating profit having been reached, the dilution risk here as a prospective shareholder seems low and I like the way the company is currently re-structuring its debts to achieve a lower level of interest due.

The move in palm oil of +18.7% since October and the move of only +3.5% in Dekeloil is a major indicator to me that the wider market has not acknowledged fundamental changes in the business in favour of Dekeloil.

Overall, the implied margin growth and thus expected profit increase from having ownership over 100% of the Ayenouan project suggest to me that the current market capitalisation of £28.5m undervalues the forward growth of the business. In addition, the upward trending prices do not 






Monday 2 January 2017

Starcom Systems Financial Analysis

None of the information below should be viewed as financial advice.


Data:


Financial information prior to the FY 2014 results was not included due to a move from accrual accounting to cash accounting and some figures in this report have been rounded for ease of use.

Starcom Report in USD Revenue/Million USD Recurring SAS Revenues/Million USD Operating Loss/Million USD Operating Loss As A % of Revenue Cash Used in Operations/Million USD Cost of Sales/Million USD
Yr End December 2014 5 1.3 2.9
58.00
0.831 2.49
Six months to June 2015 2.64 0.793 0.691
26.17
0.261 1.48
Yr End December 2015 5.1 1.6* 1.6
31.37
0.4 1.9**
Six months to June 2016 2.5 0.845 0.613
24.52
0.2 1.55
Yr End December 2016 - - - - - -


*1.18m Revenues after cost of sales and administration expenses.
** Does not include a 1.1m decrease in inventories.


Analysis:

While the data collected above is useful for achieving a comparative understanding of Starcom’s historical performance year on year, it’s significantly more useful to analyse this data in acknowledgment of the company’s more recent achievements. 

The below quotes are taken mainly from the 2015 FY results:

  • “we remain cautiously confident that second half revenues should comfortably exceed the first half and therefore that annual revenues will exceed last year’s"
  • “The Company is hopeful that it will return to profitability during the year ending 31 December 2016 by converting its strengthening pipeline into growing sales across the product range.”
  • “the recurring income flowing from the Company's SAS monthly fees is also expected to grow, and should reach nearly a third of the total revenues. This is a stable and high margin source of income for the Company that is gradually becoming the foundation for covering most of the overheads of the business.”
  • Raised £150,000 in late November in response to “investor demand” and £300,000 in mid October.
  • Collaboration deal agreed with SATO for North American market.
  • New contract signed with Pinnacle for Kenyan market.
  • New product launches for: Helios Hybrid, Watchlock Pro and Kylos Air.


Cash Position:

The use of only £200,000 cash in the six month period to June 2016 is a clear indication that major savings initiatives have taken place in the company, which will ultimately assist in making the company profitable in the near term.

Moreover, having raised a total of £450,000 (of which £150,000 was to meet investor demand) in October and November, it suggests that the likelihood of another raise in the short term is very low, which will support investor morale at these levels. Furthermore, the time gap between now and the placing of the shares suggests that any flippers of the placing are likely out of the stock now.


Revenues:

Recurring SAS revenues amounted to $1.6m in in the FY of 2015 and with these representing a very high margin product to the company, their growth in tandem with regular sales places upwards pressure on the overall product margins of the company (38% as of H1 2016).

In fact, the break down at the end of the 2015 FY report suggests that the SAS products had a profit margin of 73.8%, which is expected to only grow now that the system is fully in place and requiring less investment.

Revenue from sales moved up inline with expectations in FY 2015 ad with an evermore diversifying sales base to work from these are expected to both continue and expand at a faster rate as collaborations with SATO pay off. 

In addition to this, the publicly available data from Gurtam.com suggests that ~150 units have been sold in December via the Russian distributor for Starcom. Moreover, in July there were approximately 1,000 registered units online via Gurtam and this figure is now ~2150, illustrating the major push up we should hopefully see in SAS recurring revenues and pure sales revenues.


Operating Losses and Cost of Sales:

The operating loss year on year from 2014-15 was down 45%, in part due to a significantly reduced cost of sales, which fell 24%, but also due to major savings being made on general and administrative expenses, including a saving of $200,000 in management salaries.

Interestingly the operating loss as a percentage of revenues in FY 2014 was 58%, compared to 31.37% in FY 2015 and more recently 24.52% in H1 2016. This suggests that the move to profitability could come very soon, as it’s clear that losses are being absorbed at a faster rate as the company progresses.

Moreover, this fits in with the company’s expectation that “it will return to profitability during the year ending 31 December 2016”.



Summary:

  • A more than 50% reduction of cash in operations  between FY 2014 and FY 2015 suggests that the BOD are making significant progress in reducing the company’s outgoings and that they stand a good chance of meeting their expectations of reaching profitability by the end of 2016.
  • Rising high margin SAS revenues will feed through into the overall sales margin for Starcom, pulling their overall margin significantly higher as more units come online.
  • Compared to FY 2014, FY 2015 saw a 45% drop in operating losses, suggesting that at the current rate of business growth, a move to profitability should occur soon (bar black swan events).


For a relative valuation compared to other companies in the same sector, I would direct people to work I’ve done previously on price to sales ratios:


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