Agriculture specialist Plant Health Care (LON:PHC) today issued a new profit warning guiding profits materially below expectations despite bullish sounds over the past quarter regarding the development of its new patented-protected technology. Share prices reacted as expected, lopping off 30% the value of the company:
This doesn’t reveal the full story. PHC has been a serial disappointment as far as an investment case is concerned, continually losing money and requiring recapitalisation. The shares were worth over 120p in 2015, so today’s valuation is a new all-time low for the company. The reasons have been largely two-fold: dilution of shares plus lack of investor confidence.
A warning came out in a 7am RNS. Initially, sales were discussed without any interpretation:
A significant proportion of the Company’s annual sales are concluded in the final weeks of the year. Overall we now expect total sales to be broadly in line with those achieved in 2017.
It was later in the statement that we discover:
The balance of these factors means that the Company’s revenue in 2018 will be broadly in line with 2017 and materially below market expectation.
These ‘other factors’ seem to be largely logistic in nature: a delayed launch of a product due to slower draw-down of current inventory, and customs clearances resulting in delayed shipment.
What were the market expectations for this year? In the 2018 interims in September, the company wrote:
The Board expects to achieve full year revenue expectations, which would represent 30% growth over 2017
That is a large downgrade, and a very short time scale for things to have slipped, although should the explanation be taken at face value, we could be looking at a bumper year next year if the sales are simply pushed into another reporting period.
PHC operate in what could be considered a promising market: providing solutions for the health of major crops such as rice, corn, soy as well as fruit and vegetables. Given that virtually every country in the world produces one or more of these, the market is theoretically uncapped. Expertise is disseminated via a range of different products under the Harpin and Myconate brands. These are natural solutions as opposed to artificial ones, which further increases the attractiveness of the proposition. Food is about as safe a market as you can get – it would be hard to imagine something as basic as rice going out of fashion.
Sadly, whilst sounding promising, from the point of view of investors. Stockopedia shows that the company has been consistently unprofitable:
The reasons for this can be easily distilled from the accounts:
Expenses are simply way more than monies being taken in. The administrative side features adverse currency movement of loans, but the company are spending a lot of money researching and developing new products, as well as selling and marketing them. This pattern has repeated itself over several years which has resulted in the loss record we have seen. At some stage the investment into the products has to give some type of return.
For a small cap company such a record might be troublesome, but PHC have no debt at all as represented by the net finance income shown in the summary. With $3.5m under investment, one may guess that these funds are held in a money-market type instant access account. The reason for these cash balances despite losing money can be seen from the share count (latest share count on the right):
As we may see, new shares have been issued at rather a large pace. Since 2012, the number of shares in issue has almost trebled. Looking at the average share price during this period that is a significant amount of cash. And from the 2018 interims, with net cash and investments at the $6.2m mark, most of this cash is now gone.
It is therefore pretty urgent that something is done to reverse the decline, and the trading outlook at the last interims was:
We anticipate that the Commercial business will generate cash during 2018, thereby reducing the Company’s cash burn. We are confident that the Company will be cash positive for 2020, building to further growth over the coming years.
This was reiterated in the trading statement today, with an extra reassurance ‘within current cash reserves’. Whether the market can believe that is another thing.
For long-term holders, PHC has been an absolute disaster, with no dividends paid, and a large dilution of their holdings without any increase in value. Investors must also question the credibility of the most recent statement. There is a fair amount of uncertainty in the market at present and there is no real guarantee that delayed sales may indeed, become sales.
The situation is slightly more pressing for PHC because the main method in the past of continuing operations seems to have slammed shut. The share price is at all-time low, and even raising $10m would require a disproportionate number of shares to be issued, which borders on the implausible. That leaves the option of either bank debt or bond issuance and given the current environment neither look likely to be a great fit.
Without a massive upturn in operations it doesn’t seem likely that the company will be able to get to a situation where it is cash positive without encountering some cash-flow issues. Investment into research and development appears the easiest candidate for cutting expenses, but that in itself might be a poisoned chalice, which could reduce competitiveness. Whilst the company is upbeat about the prospects of turning cash positive in 2020 within the current cash reserves, I would be inclined to view it as an absolutely best case scenario: achievable only if nothing else goes wrong. A further delay would be very costly, as inventories are starting to build up and these don’t pay the bills.
My own impression of this is a company run by scientists, for scientists. Not a great thing if you are an investor, and I would consider it a bad investment even at these levels of price. The prospects are either a wipeout or a dilution of capital, neither particularly attractive. 1/5.