26th Feb: Trader Tim’s Penny Stock Portfolio – #CYAN

@TraderTim5CYAN2 Comments

Trader Tim’s Penny Stock Portfolio identifies penny stocks that have real long-term potential. Penny stocks will be published on the blog to show how the portfolio is performing. To receive Trader Tim’s updates direct to your inbox at 10am each morning, click here.

Penny Stock Portfolio

Today, we have our second addition to the Penny Stock Portfolio.

Last week, we added Horizonte Minerals. I am pleased to report that this is now up 6.6% since last week. It started the week very strong, but lost a bit of steam and fell back toward the end of the week. I am confident it will stay above 3p and with some news, it should test higher levels of resistance.

I have created a new page on the site where you can see how the portfolio is performing.


CyanConnode

Market Cap: £31.21m
Price Bought: 0.195p
Spread: 5.5%

CyanCannode will be my second addition to the Penny Stock Portfolio. I hold a long position in this company.

CyanConnode is a world leader in the design and development of Narrowband RF mesh networks that enable Internet of Things communications. It operates in the world of smart metering, though the company used to deal in semiconductors. Cyan has undergone a tradition over the last couple of years moving away from the old semiconductor business in favour of smart metering technology solutions.

Cyan are B2B. If you have a smart meter in your home, Cyan would be the company working with your utility provider – gas, electric, water – to make sure that your readings are working, they are up to date, you’re getting the correct notifications, the data is being collected and more. Essentially, they are doing the behind-the-scenes grizzly stuff to make these applications work.

Smart Metering

As mentioned, smart metering and the smart grid is where Cyan operates. Smart grid is just a term for the underlying network and infrastructure that powers smart metering.

This is in an interesting area, which has major growth opportunities. However, it is also a fundamentally better method of operating than the existing methods. It allows costumers to receive information on real-time consumption meaning more transparency on billing. A gripe most customers have with their utility companies. Utility companies will receive accurate information on energy consumption, which will allow them to better target outages and wastage. It will allow energy companies to become more efficient.

Also, looking further into the future, smart grids can assist with better integration on renewable energy. For example, smart metering could be integrated with weather forecasting and be programmed to utilise solar power during sunny intervals and power produced from turbines during windy spells. Overall, smart metering presents an opportunity to have a more intuitive system to govern energy usage and consumption both from the perspective of the consumer and provider.

This dovetails nicely with the technological emergence of the Smart Home, which with the recent launch of Amazon’s Alexa has taken a major step forward in terms of understanding and accessibility. Smart metering has a place here in itself purely based the efficiency and improvement it adds. However, Alexa and robotic assistants enables smart metering to take on a technologically desirable, even perhaps aspiration, tone that it has not had before.

A Major Growth Story

The exciting aspect of Cyan and the reason I’ve added to the Penny Stock Portfolio is the growth potential this AIM stock offers.

The EU has an goal of 200 million smart meters for electricity and 45 million for gas will be rolled out in the EU by 2020, which represents a potential investment of €45 billion. The UK has its own commitment: 53 million gas and electricity meters to all homes and small businesses in Great Britain by the end of 2020.

India, Sweden and multiple countries around the world have polices conducive of drastically increasing the use of smart meter penetration. Smart meters tap into energy efficiency, renewables, climate change and technology – all hot topics which governments love to show that they are supporting. Cyan stand to benefit massively from this increase in reliance on smart meter solutions. Cyan – assuming they secure the contracts – will be providing the infrastructure and solutions powering this usage. The company’s focus to shift from hardware applications toward a more software focused business is also very interesting. This allows Cyan to convert this surge in deployment into material recurring revenue.

Connode Acquisition

Cyan completed a “transformational acquisition” of Connode AG in July.

Connode accelerated Cyan’s business offering by helping to facilitate the transition from semiconductors to smart metering and from hardware-focus to software-focus more quickly. The company estimated that the acquisition has saved 18 months of work and approximately £2.5 million in costs. Also, the it has rapidly accelerated the Cyan’s product roadmap.

Connode brought with it some key contracts including a UK contract worth approximately £25 million, possibly more, as part of the UK Government’s smart meter rollout programme. This contract is for software licences and support fee revenue, which comes with an extremely high gross margin. Connode also brought in key contracts in India as well.

Discounted Placing

In June, Cyan underwent a troubled placing to secure the funds to acquire Connode. It raised £12 million at what was a heavily discounted price. This created significant dilution – doubling the number of shares on issue. This is a red flag, but one I am willing to look beyond. The placing was certainly not without issue, but I think the Connode acquisition, which was the reason for the placing, offers significant value to the Cyan business.

At first glance, the placing may not seem too bad. It was conducted at a discount of 14.3%, which is a on the larger side. However, given the size of the placing, this could be labelled excusable. Cyan doubled the number of shares on issue, so demands for an above average discount given the above average dilution and liquidity issues is fair enough (at first glance)!

To complicate things, while this placing was being drawn up, Tom Winnifrith announced to readers of his blog that Cyan were preparing a placing at a strike price 0.21p. This caused the share price to fall ~30%. Cyan released an RNS confirming that “it is considering its financing options to raise approximately £12.5 million”, though terms were yet to be agreed. The placing then was announced via RNS at a price of 0.18p at a discount of 14.3%. Therefore, the majority of the fall had already taken place in the weeks before the announcement. The saga of AIM penny stocks…

Therefore, it is tricky to account for what happened. No mention is given to how the strike price was formulated in the RNS. I suspect that given the level of dilution Cyan had limited financing options available, so had to incur a sizeable discount to get the placing through. That said, the leak certainly didn’t help the company.

On the plus side, management participated handsomely in the cash raise stumping up £304.5k. Also, they agreed to one year’s worth of pay in shares. I think it is a good sign when the management have skin in the game. Herald Investment Management and Legal and General also have equity ownership positions of over 6%.

Trading

Cyan gave a trading update in January. Revenues came in at £1.8 million – an increase of 560% compared to the same period last year. A big rise, but admittedly from a small original base. However, this is a positive sign as revenues from the various contracts begin to trickle through.

As mentioned, Cyan secured a transformational £10 million purchase order for smart metering in Iran in 2016, which they will be delivering throughout 2017. The company has a strong presence with Larsen & Toubro in India – they have received 3 purchase orders to date for smart meters. Through the Connode acquisition, Cyan are now involved with the UK smart meter rollout programme in a contract that is estimated to be worth £25 million. More recently, Cyan received a purchase order for 100,000 Panmesh software licenses from HM Power in Sweden. The company also secured a $5.4 million 10-year contract with a major utility company in Bangladesh, which offers significant recurring revenues.

This is just a few of the contracts that Cyan have in place. Credit to the management in securing these significant deals and getting these over the line. The most appealing aspect of Cyan at this stage is the growth potential, particularly global growth potential. The company is licensing their technology to utility companies, who resell it and handle the implementation. This makes Cyan very agile. They can operate in many markets and expand into new markets with relative ease and minimal barriers. This is shown by the global nature of the contracts Cyan has secured to date.

Timing

The main reason I am adding Cyan to the portfolio now is entry price. Against a backdrop of secured contract, growing revenues and market expansion, the share price has not significantly shifted. It spiked on news of the £10 million Iranian contract – 130% in a day. That has now fallen all the way back. The placing in June obviously disrupted any share price momentum. The company have raised money since the discounted placing and have also onboarded some strategic financial backers.

That said, the share price has clearly been suffering a hangover since the June placing. Investors are perhaps a little anxious to get back involved. The recent news of $5.4 million Bangladesh contract with significant recurring revenues left the share price unmoved, which is crazy and why I think the company is undervalued at these levels. Added to that, the other contracts that Cyan including a role in the UK rollout programme has secured. Once the sentiment and nerves clear, I think the price will head northwards.

Opinion

Cyan captures two important investing themes.

Buy boring companies. A popular investing mantra. Now, Cyan isn’t a boring company, but is one that perhaps is easily overlooked. The next generation Smart Home powered by Amazon Alexa, which has robotic fridges, sound-controlled lighting and intelligent energy systems – is the world that Cyan operates in. It is actually producing cutting-edge technology. Cyan doesn’t bear an inflated valuation that many tech companies have. I think the perception is that this is a fusty, old energy company on AIM. In the coming years, I think smart metering will undergo a rebrand whereby it moves from a novel energy initiative to something that firmly belongs in the tech ecosystem.

Everyone is aware of the success of ARM Holdings. ARM primarily supplied the micro chips that went in the iPhone. With the metric success of the iPhone, ARM’s valuation considerably rose. The lesson for investors was that the companies that make the parts are just as important and lucrative as the companies that sell the devices. In fact, it became an investing trend to look beyond the latest device or gadget and at he companies that were making the chips or processors behind the end product. Cyan taps into this philosophy. Smart meters are growing. Cyan doesn’t sell smart meters, but it has the networks, the software and the infrastructure that smart meters rely on.


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If there are companies that you want me to cover in the coming days or have significant news due imminently then let me know. My aim is to deliver value to readers, so I want to ensure I’m doing this as much as I can.

2 Comments on “26th Feb: Trader Tim’s Penny Stock Portfolio – #CYAN”

  1. Market cap here is £31m+. Very rich for a Co. with small revenues. How can you justify such a valuation?

    1. Hi Andy,

      Thanks for the comment.

      You make a valid point – Cyan’s valuation is a little punchy compared to the revenues generated to date. However, I think the value in Cyan lies in forward-looking revenues. They have secured a number of significant long-term contracts, which means stable revenues. As Cyan wins more of the contracts, these revenues will continue to grow and involve significant portions of recurring revenue. This I think is a really good, sustainable business model. The change in focus and acquisition of Connode should not be overlook – Cyan’s revenue performance has already drastically improved as a result of these two factors.

      That said, we’re talking about penny stocks, so nothing is a certainty.

      Thanks,

      Tim

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