Special Feature
It seems that it is not just us, but the directors also do not believe the current valuation of the company. The RNS of 9 May 2012 is particularly telling in which it notes that Non Exec Director Robert Emmet exercised all his options, options over 3.545million shares and immediately sold them, such that he then had no holding in the company. Hardly a vote of confidence. Perhaps, even more interestingly, the share options issued to key management that were due to expire in 2014 with exercise prices centred around 3p and 4p were extended to 2022. Reason given? “...in order to regularise the position, and avoid any immediate shareholder dilution...” Cough, cough! So, it appears to us that there are only three ways that ADVFN can actually generate any meaningful profitability:
1. Monetisation of rising registrant numbers. Given intense competition in this area and the general acceptance that the market is saturated/mature regarding new price feed subscribers, this will be a hard task for ADVFN. The new content routes of ebooks and the “newspaper” may be being consumed by readers, but whether they are ultimately willing to pay for this, we doubt.
2. Increased subscription costs. Per (1) above, with free level 2 pricing available from various vendors now, the point of differentiation for ADVFN has all but disappeared. Again, increasing end user subscription costs seems impossible and, indeed, in recent months they have been offering discount “deals” on their various packages.
3. Increased advertiser revenue. In this marketplace, of which we are very acutely aware, financial firms are guarding their wallets exceptionally well at the moment. ADVFN’s mainstay advertisers are the spread betting and CFD firms and reports from the likes of LCG and the goliath that is IG have not painted a pretty picture re profitability. One of the first areas to be cut in a downturn is, of course, marketing and a glance at ADVFN’s website shows a lot of their own “ebook” promo’s taking up banner space that was previously reserved for 3rd party paying advertisers as well as likely “non sticky”/ repeat players like film funding and student housing sellers. Another ominous sign...
Taking all the above into context — a woefully undercapitalised balance sheet, intense and intensifying price competition for their subscriber service, a very difficult advertising backdrop and the total absence of any Director’s commitment by way of share purchasing (aside from very low base option exercises) in recent years, then here at SBM we will be shocked if there is not a profits warning to come or a capital raising during 2013 and perhaps both. Mr Chamber’s statement in October of last year, “The future for ADVFN is bright. We have more opportunities now than ever before, as much competition fades. Market conditions appear to change a great deal more than our business performance and affect us a good deal less than others. This allows us to look forward with confidence. We feel it is fair to say bear markets do not last forever”, will come back to haunt him (and his investors) we think. The only other cash outside a capital raising and natural revenues that the company may have coming in is linked to the “sale” of its subsidiary Equity Holdings to Brian Basham and where Basham is potentially liable to pay £50k p.a. Hardly likely to make a dent! Here’s an interesting and important point to make to novice traders/investors — market capitalisations of stocks can remain disjointed from fundamentals for a long time, but when a company needs to raise capital, and particularly from third party investors, the “chickens generally come home to roost” as the new investors take a dispassionate look at the true fundamental worth of the business. This situation was illustrated exceptionally clearly in another stock we have covered extensively in our publication — Ceres Power. When their backs were against it, they were unable to raise capital from existing shareholders, and ultimately from a pre placing share price of over 10p, they raised capital at 1p. Unless Mr Chambers can convince someone else that his business is really worth almost £30m or, most unlikely given the Directors record in recent years, put his hand in his own pocket and fund up the likely required cash, then we foresee the same scenario here — a rebasing to the true fundamental worth of the company which we think is around 1p per share. Disclosure – SBM contributors intend to take a short position in ADVFN, 72 hours after the publication of this feature.
20 | www.financial-spread-betting.com | February 2013