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Ethernity Networks Ltd (ENET:LON) - A nano cap tech firm trading below Net Cash

8/29/2018

7 Comments

 
I stumbled upon Ethernity Networks Ltd (LON:ENET)  whilst looking through companies with negative enterprise value. Amongst the usual garbage of Chinese RTO's and moribund financial firms I came across ENET.  As it was listed as a technology firm I figured I'd check it out  since they  can often have plenty of cash sat on the balance sheet.
The firm floated on the AIM (Alternative Investment Market) of the LSE back in June 2017 with an IPO price of £1.40. After a rise to £1.85 the share price has drifted down to a low of 27p and currently sits at 30p per share.

Picture
Source; Morningstar.co.uk

The next port of call was the company's website to pull up the most recent financial information and take a look at the balance sheet.

Picture
Source; ENET 2017 Annual Report


The company has $14,950,578 in Cash & equivalents  and Total Liabilities of $1,180,150

Net Cash = $13,770,428 or £10,588,398

The firm's current Market Cap is  around £9,755,455 meaning that ENET is trading at an 8% discount to Net Cash.

Current shares outstanding = 32,518,186

So ENET has Net cash per share of 32p vs a current share price of 30p

The other current assets are comprised of trade receivables and a grant from the European Union. I have no idea what contractual restrictions are placed on the grant other than the fact that it doesn't have to be paid back.  


Getting into the stock below net cash means you get the operating business, property and intangible assets for free.
What's the catch?

A number of things;

a) The firm's performance since its IPO has been disappointing  with revenues and earnings being impacted by an abrupt order cancellation from an OEM customer.

Management notes that;


"Revenues for 2017 were $1.52m (2016 $2.16m) with gross margins and operating profits of $1.30m (2016 $1.15m) and $152k (2016 $339k) respectively." - 2017 Annual Report

b) Whilst the firm has been in business for the last 15 years it has only floated on the AIM market of the LSE for just over a year. Investor uncertainty and lack of coverage is also likely contributing to a depressed share price.

C) The company is currently dependent upon a small number of customers, as of 2017 5 customers account for 77% of revenues.

Despite the underwhelming performace thus far the company is still profitable having earned £159,471 or 1p per share in for FY2017.

There are also promising signs that revenues and earnings have the potential to rise in the near to mid term;

"We commenced discussions with a number of the major telecoms operators and Original Equipment Manufacturers (OEM’s) in the latter half of 2017, which are ongoing, regarding our solutions and we continue to receive confirmation of their interest to utilise our products and solutions in their networks. In recent months, their feedback has been that the Company’s offerings are unmatched by competitors in the market place, based on the market shift to the use of ‘cloud infrastructure’ at the network edge. Many of these discussions have
advanced significantly having passed proof of concept and evaluation at the prospective partner level, including software companies, OEM’s and server “White Box” manufactures and we strongly believe that these will lead to future long term engagements." - 2017 Annual Report

Management has some skin in the game with CEO David Levi owning 20.8% and VP R&D Shavit Baruch owning 13.8%.

Picture
http://www.ethernitynet.com/shareholder-analysis/
MY thesis for ENET is the following;

The company is trading at an 8% discount to net cash and a P/B of 0.64, it is profitable and has the potential to achieve higher revenues and earnings in the coming years. If news emerges of some major orders and revenues and earnings start to grow I think this stock has multi-bagger potential.

Thanks for reading,

David

Disclaimer: Long ENET

7 Comments
Brandon
8/31/2018 08:59:40 pm

Hi David,

As you explore more nano and OTC stock opportunities, are you sticking with your discount broker, or have you moved to one with a wider array of stocks like Interactive Brokers?

Cheers,
Brandon

Reply
David
8/31/2018 09:09:34 pm

Hi Brandon,

I actually managed to buy ENET through my discount broker but I plan on opening an account with IB pretty soon to get wider coverage. I'd like to start looking at Japan and other global markets to find more ideas and my discount broker only covers the UK, parts of europe and some stocks in the US. When you are looking at small companies like this its worth having a few accounts with different brokers, there's nothing worse than finding an interesting stock and then not being able to buy it!

David

Reply
me
9/2/2018 07:54:25 pm

Where did you see that the weighted average number is 32,518,186? According to the filing from June 19th this number is 25,397,245

Reply
David
9/2/2018 09:48:38 pm

Hi there,

I noticed a number of UK financial sites were listing the share count I eventually used and not the number listed in the June 19th filing so I divided market cap by price per share to check and it tallied.

Reply
Itay
9/3/2018 06:09:44 am

So, this is obviously wrong.
In addition, the revenue is well below mkt cap. I don’t think it could be given high PE or PS

me
9/8/2018 12:24:05 pm

so, the latest filings shows that the shares count is 32,518,186. So, you got it right. Anyway, this is a melting ice cube...
Normally, I'd be happy to hold a company with a price of 24.5p and cash of 11.9M$ or 0,36$ per share which are 0.28p per share (15% discount to share price). BUT, this one has a poor revenue which means they will never get an acceptable P/S

David
9/8/2018 06:55:25 pm

Hi there,

Yes, I saw the most recent filing.

Net cash per share is £0.25 and NCAV per share is £0.27

I never treat Net-nets as a stand alone investment but always buy them as part of a basket of stocks. Some go under, some go nowhere but the ones that have positive developments tend to really take off. I'm not concerned with the performance of the individual companies but rather the aggregate performance of the portfolio.

If you are looking for more Net-nets I suggest you look at the Japanese markets, this is where you find them in the greatest abundance. I''ll be working my way through the Japan Company Handbook shortly and will write up what interesting stocks I find.

Regards,

David

Reply



Leave a Reply.

    David J. Flood

    UK based Investor. I focus
    ​on Net-nets, Pico/Nano caps, AIM/OTC/Dark stocks & Special Situations. Balance sheets & Long-range price charts are my guide. Looking for inflection points. Do not construe my blog as investment advice, always conduct your own due diligence.  Caveat Emptor!


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