Shares in CyanConnode Tank As New Contracts Delayed Again

Shares in CyanConnode (LON:CYAN) crashed almost 30% in early trade as the smart-meter specialist warned that delays to recently signed contracts would materially impact this year’s profits. The share price immediately hit the buffers after the latest CyanConnode profit warning:

Since this morning, the share price has declined even further and sits at a shade over 2.5p. The long-term graph looks pretty laughable, although it is no amusing matter for investors. The share IPO’d a relatively long time in 2006 at 22p but since then it’s been an all-too common tale of value destruction as the share price has trundled steadily downward.

CyanConnode call themselves specialists in ‘narrowband RF mesh technology’. This drives communications in the ever-increasing ‘Internet of Things’. This sounds rather posh, but in reality the company apply this in a range of products such as smart gas, electricity and water readers for the home as well as larger commercial solutions.

What did the CyanConnode profit warning say?

The theme should be quite familiar to anyone who has been a longer-term investor: contract delays. Here we go:

In September 2019 CyanConnode announced that the Company had expected to secure substantial Indian contracts by the end of October following delays in new tenders being awarded caused by the Indian General Election. The award of these contracts continues to take longer than anticipated, and while they are still expected to be secured in the coming weeks, the Company is now unlikely to meet market expectations for 2019.

There is also bad news on another contract:

CyanConnode has carried out a review of its order book. In 2017, orders worth $48 million received from NIK LLC were announced, for territories including Bangladesh and Ukraine, with deployments expected to be over a three-year period. Whilst the Company is still in dialogue with NIK LLC regarding a rollout of these orders, the Board does not believe revenue will be received from those orders in the near term. The Company’s current order book, (excluding the NIK LLC contracts), is now £40 million.

We end on an upbeat note:

The Directors are satisfied that the Company has sufficient cash resources to execute on its strategy.

Interims were only published last month and revealed a cash balance of £2.4m.

Consistently ‘jam tomorrow’

With a Stockopedia rank of just 8, and the designation ‘Sucker Stock’ CyanConnode is one of the lowest ranked companies seen on this site. Only Albert Technologies (7), Aston Martin Lagonda (7), Plant Health Care (6) and Eve Sleep (0) have been lower. Of these, Albert have delisted already. Aston Martin shares are trading at almost half of their profit warning level, and Eve Sleep look like a dud. Plant Health Care is more or less level at it’s profit warning price. Given this was almost a year ago it doesn’t look like any material recovery has happened.

It is fair to say that a low Stockrank does provide some warning signs for investors which should be heeded.

One of the remarkable aspects is the track record of CyanConnode, or rather the lack of it. ‘Internet of things’ is a bit of a buzzword, but the underlying technologies are not. Smart controls for the home have been around for some time now. They are also available from a number of providers. Whilst we can say that its use is not truly mainstream yet, we are well on the way. So CyanConnode’s results so far have been rather barren:

These are some serious losses for a company valued at just £5m. In fact, other small companies have kicked the bucket for much less. But in effect, these losses have been met by shareholders, and shares have been issued every year:

With the share price at an all time low, it remains to be seen whether this is viable this time around. In the meantime there has been plenty of dilution. Average number of shares in issue have jumped from 14.1m in 2014 to 139.2m in the last year.

Where is the money going? 

Perhaps my understanding of the business is lacking here. It is hard to see where this amount of cash is going. The balance sheet reveals no tangible assets of note. Very few development costs are capitalised. And we have an increasing accounts receivable pile. Whether this will ever be able to be collected remains to be seen.

It appears that a big chunk of money disappears as ‘other’, which is chief cause of loss.

Executive remuneration appears excessive here. The key man remuneration for 2017 totalled £495,000 and even in this year was £235,000. Despite directors owning a large chunk of shares, this does not strike me as interests being well-aligned. He is also designated as Executive Chairman, which does not seem appropriate governance.

Customer concentration is a massive risk here. The top 3 customers account for 85% of all turnover in the last year. Three quarters of this in the Indian market.

There are also a stack of related party transactions, the largest being an inter-company loan to CyanConnode Limited. These loans are unsecured, interest free, and have no specific repayment date. At a closing value of £51.9m, the amount is colossal relative to the size of the company.

Is the CyanConnode profit warning a buying opportunity?

Quite why there has been a consistent level of losses is beyond me. Some of the products that CyanConnode makes are readily available from many players. It does seem that the prospect of a massive order from somewhere has constantly led investors to believe that a multi-bagger is around the corner.

Considering the type of competition available in the smart-meter market I don’t believe that CyanConnode will end up longer-term winners. The end game will be further integration with other household appliances.

Even at this low level I feel further falls could be on. The company claims it has enough cash. But a broker update today puts projected losses this year at £4.8m. Next year’s projected income is £12.3m, almost four times what we have seen this year and the past suggests that this will be quite optimistic. Even a small miss will see them needing the markets for cash, and it seems that even peer-to-peer may not give them the amount they need. A further CyanConnode profit warning in the future would be no surprise.

I view this as a bit of zombie company which has delivered quite a fine ride for its employees, but not shareholders and there is a heavy risk of wipeout. 1/5.

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