Clean water technology pioneers Mycelx Technologies (LON:MYX) today have slumped by over 40% as the latest trading update has revealed that many project bids have over-run and hence will not be delivered to next year. The share price reaction was unforgiving:
This is an share with not much liquidity, and any share price moves have been muted. Having reached over 260p earlier this year, the share price now looks set for an extended spell back on the sidelines. Prior to the move up last year, the share had very little movement and was stuck at 100p, around the area in which we sit today.
Mycelx are an exciting share for many investors. They specialise in clean water technology, which has plenty of applications, particularly in the oil and gas industries where efficient water management can make a difference. They have proprietary products which enhance the filtration of water, which is based in technology to produce high performance and accuracy. With a goal of industry-wide adoption, it is understandable why this has gained a following, as given the current market capitalisation there is plenty of upside.
However, older investors may not share that excitement, as will become apparent.
The warning comes in a morning RNS entitled ‘Trading Update’. The company were pleased to announce:
The Company experienced a strong first quarter in 2019 but is facing delays in previously anticipated project bids. A significant number of these have either moved to 2020 or the start date has been delayed to later this year. Historically, MYCELX has been more active on project bids in the second half of the year, particularly in the Middle East, and therefore expects activity to improve in H2 2019.
This is quantified into numbers as follows:
MYCELX management has taken action and reduced the costs associated with the delayed project bids. As a consequence of the delayed bids, the Company is revising its current revenue expectation for 2019 to ca.$20.0 million, below existing market expectations.
This appears to be a massive miss. Current expectations had pencilled in $36.9m so either there are many projects being delayed, or alternatively some very big ones.
Profits are also mentioned:
As a result of the revised revenue expectations, together with the expected effects of the cost reduction measures taken by management, the Company expects to report EBITDA of ca.$2.5 million and net profit in 2019 of ca.$500,000. The Company expects to end the financial year with net cash of ca.$4.5 million. This revised guidance excludes the impact of any unexpected project opportunities which may arise before the end of the financial year.
These results are hugely down on last year (EBITDA $5.6m, net profit $3.1m). This will also be a blow for investors as the company had just emerged from several years of losses.
It does seem a shame to be issuing a profit warning as the last year was a bumper one for Mycelx. After years of losses they almost doubled their revenues in 2018 and produced net profits of $3.1m. All metrics were looking in great shape. The previous years had seen a large outflow of cash as the company spent heavily on capital expenditures, which was now tapering off: this definitely fits the pattern of an investment paying dividends:
This isn’t quite literal, as the company doesn’t pay dividends which is no surprise. The figures don’t tell the whole story as capex tailed off for other reasons as well. Given the losses, the company have been able to keep the company afloat by issuing equity: from 2014 the share count has risen from a low of 13.6m to a high of 20.0m today, which is a big devaluation for holders.
Perhaps longer-term holders would recognise a pattern here, as MyCelx may be regarded as yet another of these companies that have bombed after floating. The share was initially a success, more than doubling its price to around 550p. But mid-way in 2014 the wheels started to fall off and the company issued a series of profit warnings as the price collapsed to almost nothing. Because of the thin spread, many investors of size were unable to get out.
So whilst holders may have been impressed at the rate of recovery here (anyone buying at the very bottom would still be doing very well today), they may have some wry smiles as many of the reasons for those profit warnings appear to be repeating themselves almost verbatim: project delays, promised H2 weightings, sector exposure to oil and gas. It should be noted at these profit warnings the hit to the share price was also large.
One of the comforting factors that the company has used is the cash balance. There is no net debt, and there is only a small amount of intangibles on the balance sheet. It has a term loan for the purchase of a building which sees $500k ring-fenced. One point that may be raised is that the rapid expansion is that many items have expanded rapidly: accounts receivables, as well as accounts payable and payroll/accrued expenses. It is of most importance that these assets are collectable. Aside from that, there is a credit facility of $1.875m. These resources indicate that the company is not in any immediate danger.
Given the types of falls seen on previous occasions, it could be that this is a bit of a falling knife. Even at a market cap of £20m, this could fall further on these results.
There could be a bit of binary thinking here. On one hand, we could believe the company and that the delays in contracts should come back in the next year. By that metric, the price is quite good value, and if the company can fulfil its ambition of becoming an industry-wide standard, the share price could easily go back to the 550p seen a few years prior. The cash balance gives some comfort to that the company will be able to see out this rough period.
The other case asks some questions that may not have easy answers: with the oil and gas industries being worth billions and revenues of Mycelx being $20m why is the rate of adoption so slow? Furthermore, without any change in the structure of the industry, what is to stop the reasons for the warning happening again in future? The previous strategic response was to cut costs to mitigate the loss of the revenues, but is capex at an artificially low level now, and does the company have what it needs to continually improve their product? With the level of cash as it is, we could be confident of surviving one bad year, but two might be a push.
Although the product is quite exciting at the current share price I am inclined think there is not great value here. 2/5