It’s a depressingly familiar stock market tale: a company has promising technology and a big market to sell it into, but something prevents all that promise from turning into profits and the shares collapse.
This is the situation we face with Tekmar, the supplier of protection systems to undersea cables and pipes, which we added to our Inheritance Tax (IHT) Portfolio in December 2020.
“There are surely few markets as packed with potential as this one, as Britain prepares for its Green Industrial Revolution and to throw money at wind power,” we wrote earlier in the same month when we tipped the shares for the wider readership.
But the company has struggled to turn that potential into cash and now finds itself in a financially precarious position.
Its plans were blown off course by the pandemic and it suffered a series of delays with contracts. A new management team has done its best by controlling costs and by selling new shares to raise money, but continuing losses threaten to undo that good work.
This is despite the fact that the company is still winning big contracts, such as one to supply a cable protection system for the Dogger Bank wind farm off the east coast of England and a $10m (£8.2m) contract for pipeline support and protection from “a major subsea customer in the Middle East” – Tekmar’s largest single contract award to date. But in its interim report published last week its bosses were candid about the hole the company found itself in.
Alasdair MacDonald, the chief executive, said: “While we are making satisfactory progress in delivering on our strategic plans, our planned time frames to establish the improved financial performance for the business are being hampered by the prevailing industry conditions.”
He noted that the £3.7m raised in the share sale did “not go as far as the board would have wanted in fulfilling the objective of strengthening the balance sheet”. He also referred to “material uncertainty” over the renewal of loan facilities due to expire in the autumn.
“The board recognises this creates a potential vulnerability for the business, particularly at a time when the industry environment remains challenging,” MacDonald added.
Developments such as these are guaranteed to send shareholders running for the hills and the share price collapsed by 38pc on the day of the announcement.
Sometimes after such a severe decline share pries recover a little as investors digest all the detail, but not this time: Tekmar’s shares have fallen further and now stand 79pc below where they were before the announcement. Our loss since they were added to the IHT portfolio is an even more painful 89pc.
The market is signalling its doubts about the company’s ability to return to profitability and its bosses have acknowledged its plight by announcing, on the day of the results, that they are putting it up for sale.
“While the group is currently operating with sufficient working capital for its present requirements, the group may not have the necessary cash to make all the required investment to deliver fully the turnaround strategy to return it to profitable cash generation within the timescale targeted by the board,” the company said.
“The board considers that the group’s best interests would be served by seeking a strategic partner to support its opportunities for growth and provide additional balance sheet strength. The board has now determined to undertake a review of the strategic options open to it in order to maximise value for shareholders. These options include, but are not limited to, a sale of the company.”
Needless to say, the company is not selling itself from a position of strength.
There remains the danger that things deteriorate further, especially if no buyer is found and the company is unable to renew those loan facilities in the autumn.
Some investors may want to hang on in the hope that the market has overreacted, but we will take what little is on the table now and sell.
To maintain the IHT exemption of the funds, readers will need to reinvest the exact proceeds of the sale in another qualifying Aim stock.
Questor says: sell
Share price at close: 8.25p
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