Shares in plastic additive specialist Symphony Environmental Technologies (LON:SYM) fell over 20% in early trade today. A trading update revealed that second half revenues would not hit their target, and the year would slip to a loss. The markets punished the latest Symphony profit warning:
As far as the figures say, this company has been public for some time. It has been listed since the end of 2001. The share price on that date was 47.20p and the share price has not been pretty since. Barring a couple of rallies it has been all downhill. There have been no dividends paid either, so shareholders may have gotten little out of this share at this time. In 2018 we had a spike where the share doubled inside a couple of months to sit at over 30p, but since then it has slid back down. Volatility is par for the course for this share it seems.
Symphony are probably a company that would excite people on first pass. They describe themselves as a world leader in plastic additives. These have a wide range of applications, but the main one (d2w) has the ability to make plastic decompose after a short while. This is very much in vogue at the moment. But it does not stop there. They manufacture other additives that can give plastic different behaviours such as anti-fire, anti-bacterial, and even as a security measure.
What did the Symphony profit warning say?
The headline is straightforward: this is the first item mentioned in the RNS:
Revenues for the second half of 2019 are now expected to be not less than £4.1 million, broadly similar to the first half. Accordingly, revenues for the full year 2019 will be below market expectations resulting in an operating loss of approximately £0.5 million.
The reason is a pretty well-trodden one: timing of orders.
We reported in our Interim Results on 27 September 2019 that sales in the first half had been impacted due to inventory adjustments by some of our customers as a result of legislative clarification in certain markets. These factors persisted throughout the second half, as both business drivers, legislation and enforcement activities regarding the manufacture of plastics, remain in a fluid period of change. Consequently, higher d2w purchases expected in Q4 2019 have been deferred and are now expected to be placed in Q1 2020.
This line is correct,and indeed this was hinted at in the interims. Perhaps the potential profit warning then has now been crystallised.
Asset-light, turnover light
Symphony’s results seem to be consistently ‘jam tomorrow’ and their track record of profits is not impressive at all, this comes as a bit of a surprise.
Given that total revenues actually decreased a couple of years back, this would go some way to explain the volatility in the share price. A good year of profit in 2017 may have convinced investors that the recovery was underway. This was to be crushed by the next year when results were back to close to break-even.
The balance sheet is extremely light here, barely any inventory or intangible assets. In fact the total asset position stood at only £3.5m at the last accounts. This is complemented by a very small liabilities position with accounts receivable and a small bank facility making it up. The last accounts showed a current ratio of over 2 and this may have improved slightly as the trading update reports net cash of £1.2m at the end of November this year. So in the short-term at least there appears to be no immediate danger. The last year showed a very large increase in receivables. Looking at the client list there appears to be very big businesses among them.
Previous losses have been financed by the issue of shares. Over £2m has been raised in this way over the last couple of years. This has led to a large growth in the share count. The co-founders still are a major part of the company, being CEO and CFO, and the board have a large range of warrants at various strike prices. One of the previous RNS gave notification that the terms of these were being amended to be more beneficial to the recipients.
A look at the customer list shows that the UK are not really a part of sales at all:
In addition we have a major customer disclosure: one customer made up £2.235m of revenues and this number was decreased from £2.861m the previous year. Given the distribution the customer seems likely to be Grupo Bimbo from which there is a long-standing trade history.
Is the Symphony profit warning a buying opportunity?
Something seems amiss. If the company has good products that are market leading, why has there been a struggle to sell more of them? Getting supermarkets to use plastic that is environmentally responsible is knocking on an open door. While the product functions look great, the presumption must be that the technology surrounding them is not able to be patented. Therefore similar types of solution are available at other places. A quick Google search confirms that other companies make biodegradable additives.
The product suite looks mature: capex has slowed to virtually zero in the last couple of years. Perhaps that might be a position forced by cash. In a world where the product is perhaps a commodity, maybe it isn’t worth it. There may also be difficulty in truly assessing quality of product.
In common with a lot of other small companies I do believe this to be quite highly geared. Wages and salaries make up a large part of the costs for now. Should turnover increase massively this would feed into the bottom line. Trouble is, it seems like a hard slog on the results so far.
This is not a disaster: the company seems to be just about treading water. Clearly the loss of the major customer may quickly make it unviable. On the flip side, it is operating in a market which seems likely to be heavily expanding. The house broker, unsurprisingly, seems bullish on the future prospects. For me the track record of little to no profits puts me off. 2/5.