Last month, shares in small-cap graphene company Versarian (LSE: VRS) slumped by around 20%.
In my opinion, this decline was unwarranted.
The only news the company published last month was a trading update ahead of its annual general meeting on 24 September. In the update, Versarian revealed that it was progressing with all its collaborations and activities in China, which shouldn’t have inspired investors to sell.
Specifically, CEO Neill Ricketts said that Versarian, “has continued to make significant progress since the release of our annual results on 17 July 2019, in particular with a number of our collaborations and our activities in China.“
Management is currently spending most of its time with Chinese partners as it wants to conclude a deal in the country as “soon as reasonably possible.“
The primary partner in the region is the Beijing Institute of Graphene Technology Co. Ltd (BIGT). BIGT has helped Versarian set up an office in the country and secure “endorsement and support of provincial Chinese governments” for a joint venture between the two parties.
According to the pre-AGM update, BIGT is also working with Versarian in identifying “factory facilities within preferred key strategic provinces.“
And the Institute is committed to helping fund the project as well. It is working towards the purchase of up to 15% of Versarien’s share capital through the issue of new shares.
A deal in China could be the catalyst that wakes up the Versarien share price, but the environment is not getting any easier for the group. The trade war between China and the US is causing some severe friction in the global economy, and there is also a risk that the US might look to limit outside investment in China. It is not clear how policymakers would do this, but any efforts to curtail Western investment into China are likely to have a knock-on effect on Versarian’s progress.
With this being the case, even though shares in the graphene company look cheaper today than they were a month ago, I don’t think the stock is a ‘buy’ right now.
Wait and see
Versarien is still in its early stages of growth, and the company has a long way to go before it is self-sustaining. In the meantime, it will rely on third parties to provide the funding to keep the lights on. Any major setback either with the firm’s own growth plans or with a US-China trade deal might inspire backers to pull funding. That could be a big headache for the group.
That being said, if the company does manage to ink a manufacturing and distribution agreement for graphene in China, then the sky could be the limit for Versarian.
However, with so much uncertainty shrouding its outlook at this point, I think it might be better to stand on the sidelines and wait for more clarity before taking a position.
There are plenty of other small caps out there with much brighter prospects in the meantime.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019