Investor's Champion Blog
Provides refreshingly forthright, independent comment on predominantly small cap companies and specialist investment funds. Informed opinion, based on first-hand research, but pulls no punches in exposing management weaknesses.

Screen Technology - another disappointment

A negative announcement today from Screen Technology regarding its manufacturing partner sent the shares down nearly 25%.

Screen Technology is the designer and manufacturer of high-resolution, large-screen displays designed for high ambient light environments.

Whilst the news was bad surely it doesn’t appear to be 25% bad! On closer inspection the meteoric fall arose as a result of a massive 2,200 shares sold during trading hours, equivalent to £900 in value!

It’s business as usual from Screen who always seem to disappoint just when they are starting to attract believers.

Unfortunately the current problems appear to be nothing to do with Screen but are relevant to its manufacturing partner Wilden who were acquired by Gerresheimer Group in January. Although one could point out that it was Screen’s fault in the fist place for choosing them.

While confirming that it remains committed to and excited by the potential of Screen’s ITrans product, Gerresheimer has withdrawn Wilden’s earlier decision to fund the £1.1m cost of the first high speed production machine. Apparently the Wilden deal was heavily debt financed and Gerresheimer are probably a little stretched at the moment.

In addition the acquisition process (at least they are blaming it on this) has led to a two month delay in the production of mould tools required to fully commission this machine.

The house broker has moved their expectation of production volumes from April to June, with a knock on effect on revenue and profits. It has not changed its expectations for 2008 which given Screen’s history of delays appears somewhat strange and highly optimistic. Still they are the house broker.

Screen is in discussions with a number of lenders to replace the funding previously promised by Wilden and Management report these discussions are progressing well. The house broker’s forecasts are based on the expectation that a deal is signed in April, although it will be on more commercial terms than those offered by Wilden. I just wonder how much more commercial given the newness of the technology and the limited resale potential of the bespoke machines if things don’t work for Screen.

The house broker views the upside potential as ‘enormous and could arrive very quickly after volume production begins in the form of large orders and an early move into profitability’.
However, there appear to be lots of obstacles to overcome and the longer it all takes the greater the risk of others stealing their market. I'm really beginning to wonder if volume production will ever begin.

The group isn’t expected to generate any actual earnings until the financial year ended December 2008 when the house broker estimates now point to top line turnover of £22.8m, pretax profit of £3.1m and earnings per share of 8.2p, resulting in a rating of c5x 2008 estimates. . With net cash of currently c£2m some would argue that based on these 2008 estimates the rating now looks unbelievably cheap; to my mind the current price implies that no one gives them a hope of hitting these estimates. The top line of £22.8m also looks highly optimistic to me at the moment.

More delays will stretch things out and be a drain on the cash. Even if things work out and production is ramped up I can now see them coming back to the market in 2008 so the broker’s forecast 2008 EPS is already looking in jeopardy.

You can probably tell that I’m not at all convinced at the moment, a typical predicament with a speculative AIM micro cap you might say!

Given all the uncertainty I'm beginning to think that even after today's fall in price the current valuation looks stretched.


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