For the background to Beeks (BKS), please see my June article.
On the 5th September, Beeks issued their full year results to 30th June 2019 which I commented on in that morning’s 7:59 cut. Given the interest in my earlier articles I had intended to give a fuller update later that day. Initially I delayed so I could listen to the live results presentation, then further so I could double check against the recording (published on 19th September at piworld.co.uk), and then inevitably other investing work got in the way. So apologies for the delay, but here it is, hopefully better late than never.
Before looking at the results in detail, let’s first review their record of meeting forecasts from their house broker, Cenkos (more recently they have also paid Progressive to cover them). As you can see their record is very poor in meeting revenue projections, and the EPS forecasts have been wildly inaccurate.
Note how they missed revenue by 10%. Generally revenues are known well before the finer details of profit and loss are calculated and this miss is right on the normal threshold of materiality which would require a market statement. To put it another way, the company very narrowly avoided having to issue a revenue warning in July 2018.
As can be seen above, both revenue and EPS were a very clearly a miss compared to forecasts, despite reductions through the year as the hoped-for Tier 1 contracts took longer to materialise than expected. This despite a weak pound which should have increased reported sterling revenues (although not significantly profits).
The year-on-year reduction in EPS was caused by an increased average number of shares as the company only floated part way through 2018, and is therefore of no concern. The large miss against forecasts is however all too real.
Since 99% of revenues are recurring, a critical figure in forecasting the following 6-12 months is the Annualised Committed Monthly Recurring Revenues (ACMRR). In June I said that anything much below £9.2m would be an issue and in July Cenkos increased their forecast to £9.3m. The actual reported figure was £9.1m. This appears to be due to delays with connectivity on the first tier 1 contract and the new sales manager taking time to bed in.
What I find most concerning is that neither the results statement nor brokers notes, nor the conference call acknowledges that the full year significantly missed the guidance (as communicated in company-sponsored research) that had been recently updated after the poor interims, let alone the initial forecasts.
With no need to give any benefit of the doubt in H2 2019 terminal run-rate, I now lower my FY 2020 projections from £10.1m – £10.6m to around £10.1m. This is compares with broker forecasts of £10.7m lowered from £10.9m. My projections are based on another similarly-sized tier 1 being signed imminently (or the previously announced PoC resulting in equivalent revenue flowing by the start of December), and a further tier 1 being signed up around November with revenue flowing from February / March.
It is possible that such customer(s) have already been signed up, or at least as close to signed up that work has already started and delivery will be earlier than described as above; in the latest results call it was disclosed that the tier-1 announced in December was actually signed September/November time. It is also possible that more or larger contracts will be signed in the next few months than I have modelled. The language was certainly very upbeat in the results presentation.
However, what seems much more likely is that history will repeat itself and both contracts and full implementation times will be delayed further than expected. The risk of this increases with every day that passes without a further contract announcement.
FY 2021 and beyond
It is much easier to come up with a scenario where FY2021 forecasts are hit.
The share price was steady for two weeks after the results we published and then suddenly jumped. It can hardly be a coincidence that this jump was the day after the extremely upbeat results presentation was published. While I hope investors applied some scepticism over the short-term prospects, I think there is cause for some optimism that tier 1 prospects will start to bear fruit in 2021.
Profitability / Cashflow
There is considerable comfort to be gained from the results presentation here: on the profitability side in that they are maintaining 50% gross margins; on the cashflow side that they still target a 6 month return on capital expenditure, which given the current rate of progress means it should be funded from profits. Additionally, an increasing amount of the business is expected to be around connectivity which has a lower capex requirement.
There is also the possibility of companies paying up-front, although perhaps this is less likely for a relatively small player like Beeks. Nonetheless, I can foresee circumstances where they would need to increase borrowings and/or raise equity if current contracts continue to be delayed and then several land at once.
This is a well performing company that has put itself in a difficult situation by being continually overly optimistic in its forecasting / guidance. Investors continue to value the company on (mostly genuine) high growth rates and (untenable) forecasts. While the company does have the potential to grow into this valuation, there is a danger that investor sentiment could become more realistic or, worse, swing to the other extreme, severely hitting the share price.
My expectation of a further miss for FY 2020 is supported by my model, by history, and by the company’s cavalier attitude to missing forecasts. I will update again within two months, news or no news.