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1Spatial – CEO Chat & Assessment

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I met up with Marcus Hanke the CEO of red hot penny share tech stock 1Spatial (LSE:SPA) yesterday for a detailed catch up. This company – formerly known as Avisen – has been a tale of woe for investors. Not because it has screwed up operationally but because in share price terms the stock has not performed. I will address both issues in turn but at 2p, valuing the company at £7 million, the shares are a compelling buy.

To the share price first. It was first whacked by heavy selling by those who lost in a board room bust up 18 months ago. More recently funds that I used to manage tipped out their (significant holding). That stock was picked up by the switched on team at Hargreave Hale but was an overhang. And generally the ennui among small cap investors who are just bored and tired by a lack of action and capital gains has seen a drip, drip of selling. Si that is the share price but is the woeful chart justified by operational failure?

It depends how you look at it. Results for the year ended 31st January 2012 were released in late July. I cannot see why it takes so long to get numbers out and that does not really give me the wow factor. The underlying pre-tax loss was £548,000, down from £1.513 million. But this was a year when Avisen merged with fellow AIM tech player 1Spatial and amid fairly hectic re-organisation I am prepared to ignore the historics. The two core businesses (1 Spatial and Avisen both recorded positive EBITDA and the trend looks to be their friend. The non-core Storage Fusion (more later) made a tiny loss. Year end net cash was £2.63 million.

Post year end the company trousered a £1.3 million deferred consideration payment from the sale of its Inca unit. So net cash is now, I reckon, £4 million. Storage Fusion is now operating profitably and is clearly for sale. Hanke seems to think that it is worth £10 million. I am not sure how a business which generates 2012 sales of £390,000 ( an increase of 65%) is worth that much but even a third of that valuation would leave Avisen trading at net cash.

So how are the core businesses doing? Well very big new client wins at Avisen (with Unilever) plus a growing order book at 1Spatial mean that I believe that revenues will move ahead sharply from last year’s £5.2 million and with gross margins of 35% last time (and likely to be higher this year) I could see 1Spatial reporting EBITDA of anything up to £2 million this year.

As such the company is now valued (if we strip out net cash) at just 1.5 times current year EBITDA. If the Storage Fusion business is sold… the maths are not hard to do. Hanke has been indicated that DF will be sold for a long time. I suspect that investors want to see him actually deliver and the cash land in the bank before they buy greedily. But of course those who wait for that event will have to pay more. Given the very limited downside risk (the cash backing and the fact that the business is profitable) I would buy now and just sit patiently and wait.  If SF is sold for even 30% of Hanke’s valuation and the remaining businesses were to be valued on a (hardly demanding) multiple of 5 you would be looking at a share price of 5p.  Believe Hanke on SF and apply a fuller EBITDA multiple and 10p is achievable. Either way at 2p this looks like a compelling penny share buy.

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Comments

  1. Bob says:

    Tom you have consistently called this wrong in terms of profits and net cash. Is this time likely to be any different?

  2. Bob

    And you consistently point out my bad tips and ignore my good ones in post after post. One would almost think that you were some sort of deranged obbsessive whackjob who really needs therapy.

    Why not read the bloody piece which will answer your question as to why the shares have fallen.

    If you find words with more than 4 letters too hard to understand I apologise but I do not pitch my articles at obsessive cretins with a limited intellect like yourself.

    Best wishes

    Tom

  3. outsizeclothes.com says:

    If Hanke thinks that anyone will pay x10 sales for a company that’s just turned profitable, he’s in the same deluded dreamer club as the likes of Roel Peiper [ex Pursuit Dynamics]. I’d value Storage Fusion at £1m, and only at that IF it can achieve another year of 60%+ profitable sales growth. A £3m valuation is at least 3 years away, imho.

  4. Outsizeclothes.com

    I reckon a sales multiple might see him get £3m but would agree that £10m looks a tad optimistic right now

    Tom

  5. Bob says:

    Tom
    Read my comment again but this time put your brain into gear before replying. I make no mention of the falling share price at all. I refer to your numerous ramps or tips for this stock and the frequent times that you have been wrong about the profits the company would make and the net cash that they have in their balance sheet. As for your childish name calling I seem to remember similar when you invested t1ps money into nxs at 0.9p having bought and tipped them at much higher prices and ridiculed those that criticised you. 0.11p to sell now says it all.

  6. Credo says:

    These gross margins seem incredibly low for a tech business. And operating cash flow was terrible last year, due to the build of trade debtors (100% of sales!) Would rather wait for the next set of results, as EBITDA of £2m sounds pretty optimistic.

  7. begado says:

    Interesting objects here. I’m caring for some thing similar.

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