I called AIM-listed Sosandar (SOS) a buy at 13p, moved to hold at 20p and suggested taking a slice of money off the table at 25p (I got over 27p). I still hold a shade over 75% of my holding so I’m still long, but the shares have moved up further. So perhaps I was wrong to be such a coward and cash in so quickly. But I am deliriously happy, with a good chunk of my original stake banked, a whopping profit on the rest and seemingly plenty more to come. Having offloaded a bit, I raised my stance on the rest to come to a target of 40p to 45p. But once again the shares have moved so strongly that I wonder whether the 40p mark may be troubled within days.
My assumption, in the wake of the May trading update, was that gross profit would run at around half of sales. In the full year numbers we see that sales were £1.35 million and gross profit £0.67 million. Pretty much bang on. Meanwhile, trading in Q1 (to June) was up 73% which suggests growth running at 20% a month. Annualised, that suggests monthly revenues will be up about 900% by March next year, compared to March this year. We know, from the May trading statement, that full year (to March) revenues were £1.34 million. But we also know from the company’s interims that the 9-month number, to December, was £0.86 million. Therefore Q4 was £0.48 million. We can therefore calculate that Q1 revenues were £0.83 million. If we extrapolate that 73% Q-on-Q growth we get £1.44 million for Q2, £2.49 million for Q3 and £4.30 million for Q4. That would bring FY19 (to March) revenues in at £9 million. That would suggest gross profits of £4.5 million.
What I would suggest is that the market would focus on Q4 - where the numbers would indicate annualised sales of £17 million (even if growth came to a shuddering halt) and gross profits of £8.5 million. Against that, costs will also rise. For FY18 we saw administrative expenses of £3.8 million and a further £3 million put down to the costs of the reverse acquisition (ie one-off costs). In the interims to December we saw administrative costs (for nine months) of £2.5 million, which suggests £1.3 million spent in Q4 – a pretty sharp rise. Annualise that and it comes in at £5.2 million. What might that be a year from now? I don’t know, but I would note from Note 6 to the FY18 Accounts that the boardroom costs to 1 November 2017 were £0.59 million, falling to £0.14 million from then until the full year in cash, and a further £0.5 million in shares. What do I learn from all this? I learn that costs are volatile and perhaps we will get a better idea from the interims when they come! Meanwhile annual administrative costs of around £5-6 million seems perhaps about right as a ballpark figure. That would suggest as at March 2019 the company will be profitable to the tune of around £2 million a year, but would mean that Sosandar will probably report a FY loss to next March of around £1 million. It would also suggest that Sosandar moves into profit during Q4 and may even just scrape it during Q3. That would, in my view, be quite remarkable.
Put, say, £2 million pre-tax profit on a rating of 25 (hardly a demanding multiple for a heavily growing and profitable enterprise and we arrive at a share price (with 107 million shares in issue) of 46.8p. Take 20 million options into account and that drops to 39.4p. Of course, if the market thinks that a PE of 50 is more appropriate (and growth in sales of 900% would perhaps justify that!) then we are looking at around 80p. Indeed, I can see the shares being £1 if the curent growth is maintained and costs are held under control. That is why I still hold the vast majority of my shares, but it is also why I have 40-45p marked in as the next point at which to take more cash off the table. In the short term, if the shares notch up to the 40p mark then I’ll be selling a few more. But we should have a trading statement for H1 to come, as well as the interims when I can reassess my numbers. My hope is to be able to upgrade the target price – but in the meantime, if I can get a chunk away at 40p that is what I shall do. And then I’ll be even more deliriously happy, still long and – I hope – still wrong!
Filed under: Sosandar, Horse Hill, Gatwick Gusher, David Lenigas, Folli Follie, Woodford, Chris Bailey
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