"Always been hopeful for this one but man is it a slow grind. "...

"Always been hopeful for this one but man is it a slow grind. "

Trouble with slow grinding in the case of companies that are not quite yet commercially self-sustaining, is that they need to be adequately capitalised to handle the grind.

The problem with this company is that it requires capital to make the widgets - whether it rents them out or sells them outright to faster recycle the capital.

So even if it's order books were bursting at the seams, and even if it had no manufacturing capacity limitations, the constraints on the business are its tight capital position.

It's a case of, "We need to sell more to generate scale benefits, but we can't sell more because we don't have enough capital to support faster sales velocity".

I'm not sure what the picture looks like in 9 or 12-months' time but when you have $1.0m in the bank, you owe people $0.4m, and you are consuming $0.4m or $0.5m every 3 months, then that is self-evidently a bit of a challenging proposition.

Sure, they can tap into the $1.1m debt line which is at their disposal, but that's only going to serve to raise financial risk questions in the minds of equity investors (who the company really needs to attract to get its cost of equity down from the current prohibitively expensive levels).

So it's a bit of an invidious situation and one for which the solution isn't clear.

At first glance SP3's teeny market capitalisation is attractive from an investment standpoint (the company doesn't have to make much profit for the business to valued a lot higher), but that nano-cap status is also its Achilles heel to the extent that it significantly limits the business from an access-to-capital point of view.

Having followed the company for some time (and having owned it for part of that time), I've come to the conclusion that it being a publicly-listed entity is sub-optimal.

For it to reach its true potential it really should exist as an operating division within a larger (say $100m or $200m) company which owns other mature, surplus capital generating businesses which can be used as a source of capital to fund SP3's growth.

So I suspect that there are greater than even odds that the end game is that the company gets taken over by a larger entity that is capable and happy to deploy sufficient capital required to support SP3's growth.


Because the takeover maths stacks up in my mind:

SP3 currently consumes around $1.5m pa in capital.

But it has around $5.5m pa in Staff and Admin/Corporate costs.

A new corporate owner could easily strip out at least $3.0m of those CoDB costs, which would be duplicated under corporate ownership (office space, management, HR, legal, credit department, procurement, ASX listing fees, audit fees, etc.), which would leave SP3 generating somewhere around $1.5m in Free Cash Flow

Capitalise that $1.5mpa FCF at, say 15 times (it's reasonably reliable and sticky cash flow and will be tax-free for many years given the >$10m in accumulated losses), and the result is a prospective Enterprise Value for the company of around $22m

To be conservative, off that amount net off a large $2m for acquisition-related expenses and restructuring expenses, and you get a nice round figure of $20m , or around 18c per share (including all outstanding options and performance rights).

I obviously can't speak for any other shareholders, but I'll wager London-to-a brick that shareholders owning at least 90% of the issued capital of the company today will jump at the chance to accept 18c [*] for their scrip, considering the unappealing vagaries of some of the alternatives.

[*] Probably even 15c, I reckon.

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