The Mello Effect and Preview

Mello is by far the leading conference for at serious private investors. As well as keynote speakers and panel discussions, around 40 companies present at each event. Latterly there has been some talk on twitter and discussion boards of the “Mello Effect” whereby a company’s share price rises in the hours and days after their presentations. Inevitably some companies then disappoint at which point this is described as the “Mello Curse”, mainly by speculators who hadn’t attended Mello but followed the other buyers in.

So, how real is the effect, and is it tradeable? That’s for you to decide, but below I briefly review each company and look at the immediate share price history after any previous appearances. The companies are presented in the same order they appear on the Mello website and that the article was written over a number of days during which the seriousness of my approach noticeably varied (and not necessarily in line with the merits of each company).

Ultimate Products (UPGS)

This is a top 5 holding for me and I cover it frequently here on my blog.

At the time of their last presentation (17/5/2019), the share price had already been driven to recent highs on the back of strong interim results and shareholder engagement activity through Equity Development. There was a further move up on the day, but this proved to be the high point of the year so far.

I am expecting UPGS to issue ahead-of-forecast results in the next few days, and the price has spiked this morning, perhaps in anticipation [Edit: results were generally good, prompting a further rise on the day].

Biome Technologies (BIOM)

Not a Biotechnology company, but rather a nano-conglomerate consisting of Bioplastics and RF Heating divisions. They have had recent dalliances with profits and even positive cashflow, but losses are forecast over the next two years.

They did not present in May, with the last Mello presentation on 27/11/2018, which had no discernible affect on the share price.

SimplyBiz Group (SBIZ)

Simplybiz provide information services to insurance brokers and others selling financial products. Since their last Mello presentation they bought Defaqto which provides a rating service for financial products, something virtually indispensable in today’s world of price comparison websites. While strengthening their recurring revenues further, this has left them with significant levels of debt.

They last presented on 26th/27th April 2018 soon after flotation. There is some evidence that this directly led to sustained buying in the days following and again following a write-up on the 8th May.

GetBusy (GETB)

GetBusy are a Mello virgin with two businesses – a well-established document management software and a newly launched communications product. They are currently loss making at the EPS level.

Thruvision (THRU)

Thruvision provide people screening solutions that fulfil a similar role to the full body scanners deployed in airports, but with higher sensitivity and higher throughput. Customers are global and applications include customs, security and theft prevention. There is some early-stage competition, but they have a considerable lead in a business that has long approval cycles, especially amongst the higher margin customers.

The company has not presented at Mello before, but not only do they appear to have potential on fundamentals, they also have precisely the kind of story which could capture investors imagination. I have taken a starter position ahead of further research [Edit: followed up with a further buys].

[Edit: Progressive Equity Development have now published an excellent summary of the company.]

MTI Wireless Edge (MWE)

MTI are a profitable diversified antenna provider growing mainly through acquisition. They are new to Mello.

Surface Transforms (SCE)

British manufacturer of high-performance brake discs with 70% gross margins planning to grow to profitability in 2022. Exposure to Aston Martin, the very top-end of the market, and automotive in general is a concern, however this technology is likely to make its way down to more mainstream models over time, providing a growing marketplace. The historic price to sales ratio is 34x. Significant growth and breakthrough into profitability is dependent on winning a small number of large contracts, and further manufacturing investment may be required.

The company previously appeared at Mello in November 2014 before the event was of a comparable size and scale.

LiDCO (LID)

The company provide equipment for Hemodynamic Monitoring, which monitors the dynamics of the blood flowing around the body. Their technology is already used in over 50% of NHS hospitals, but penetration elsewhere is lower with only a small percentage of the US market. They hope to increase not only market share but market size by transitioning to a pricing model based on 2-3 year contracts rather than a cost per-patient.

As you would expect the company benefits from 70% gross margins and high recurring revenues. However the change of pricing model is deferring revenues in the short term and they currently lack the scale to make an operating profit.

The company have never presented at Mello before.

Inspired Energy (INSE)

This utility (electricity, gas, water) intermediary’s valuation suffers (fairly or otherwise) from relatively high debt following a series of acquisitions and a poor industry reputation especially following the Utilitywise debacle. They have not appeared at Mello before.

Universe Group (UNG)

Universe are another Mello debutant providing EPOS and loyalty systems for petrol retailers and convenience stores. They have a diversified customer base and gross margins of around 50%, but operating margin has been poor recently.

Verditek (VDTK)

Verditek is likely to attract green investors. It’s a lightweight solar module manufacturer, lighter still on revenues, and a member of Stockopedia’s zero club due to exceptional Quality, Value and Momentum ratings. Recently they have entertained onlookers with graphine technology, Nigerian contracts and a £600,000 (before costs) placing which saw the CFO going all-in with a £6,275 subscription.

Presumably at Mello with an eye to improving the terms of their next fundraise, this would make a great story stock – if only the ending wasn’t so predictable.

Location Sciences (LSAI)

Potential investors lost as to what their USP could be given the number of apparent competitors have the opportunity to see the company for the first time.

Belvoir Group (BLV)

Slow and steady would be a good result for this high yielding letting agent franchise.

1pm (OPM)

Speciality, but not obviously specialist, finance group. They previously presented at Mello Derby in 2018. A spike in the share price on the second day of the show may have been caused by attendee buying but it proved to be short-lived.

Fulham Shore (FUL)

The Franco Manca pizza restaurant operator with a sideline in Greek food has resumed growth after cannibalisation within suburban London led to indigestion. Customer reviews are good, management are experienced and there is some evidence that they are at the sweet spot in the rollout journey with size approaching a critical mass and saturation / decline a decade away.

Kape Technologies (KAPE)

The company previously presented in Derby on the back of a strong share-price run which was extended in the weeks afterwards.

Kape describe themselves as providing privacy-first digital security software to consumers which initially gave me an uneasy feeling as traditionally this is the sort of product that customers are tricked into buying rather than choosing for themselves. After digging into their CyberGhost product however I found a serious product with reasonably good reviews.

Unfortunately I then also discovered that they also produce the crossrider range of malware. This source (which, admittedly attracts complaints over sales tactics itself) estimates the current number of PCs infected with Kape’s malware at 980,000, which is very close to their claimed number of subscribers.

On the plus side I’m told they give out free USB sticks in their presentations. Hmmm.

Creightons (CRL)

Creightons produce branded and unbranded toiletries. The management are legendary for the quality of their presentations and in 2019 their May Mello and June preliminary results presentations both seemed to have a significant effect on the share price. However with hotly awaited half-year results due out around the same time as this month’s Mello and some heavy-duty tweeting in advance, any effect is likely to be harder to discern.

Inspiration Healthcare (IHC)

A profitable medical devices company.

Franchise Brands (FRAN)

A conglomerate of franchisers such as Metro Rod.

Strix (KETL)

The kettle safety control company and small-investor favourite has recently started branching out into water filtration.

PCF Bank (PCF)

A Mello regular, including 2018. Automotive finance company, benefiting from bank status and attendant low borrowing costs.

Open Orphan (ORPH)

Very recently floated pharmaceutical services plans to help companies with R&D of drugs that are hard to make money from because they treat very rare diseases.

RBG Holdings (RBGP)

This quoted law firm, previously known as Rosenblatt appears to be a mini Burford and forecasts a jump in EPS this year following their first sale of a participation right in a damages-based agreement.

E-Therapeutics (ETX)

Computer driven drugs discovery. Early stage companies in this sector can have similar characteristics as early stage miners and I generally avoid them.

Minds + Machines Group (MMX)

Controller and marketer of various top level internet domains, allowing customers to have website names like thisishard.work and idratherbe.fishing, without the usual .com (etc) on the end. They previously appeared at in London in November 2018 leading to little obvious share price reaction.

Billington Holdings (BLIN)

A structural “steel” at the current price? Billington have shown sure but steady progress over the years, continually increasing operating margins and return on equity as well as revenues. Four years ago investors got over-excited pushing them to a PE of over 14, but today the PE is 8 on a similar share price.

Ideagen (IDEA)

This Mello regular provides software and services to regulated industries. Following Mello November 2018 the share price teetered a little, gave a gentle lurch forward and then staggered gently downwards. After a nice rest the share price recovered and a lower key appearance earlier this year was followed by a period of strength and reassuring stability.

Digitalbox (DBOX)

This digital media company known for Daily Mash and repeated share issuance is threatening profitability for their year-ending 31st December, although cashflow has historically been strongly negative.

Newmark Security (NWT)

This nano-cap has recently returned to profitability although cashflow remained negative over the full year. Recent board changes appear to be behind pre-Mello buying.

Sabien Technology Group (SNT)

This nano-cap energy reduction technology company’s founder resigned as CEO (with immediate effect) on Tuesday, leaving the Chairman (now executive chairman and COO) to present at Mello. The company owes its continued existence to the largesse of the Truell family, but hints that it may wish to raise money for acquisitions, perhaps explaining their continued public listing and appearance at Mello.

One gem I uncovered was a declaration of “£0.009m” net cash at 30 June 2018 – presumably they couldn’t risk saying “£0.01m” as investors might assume they’d got as little as £5k in the bank, which would obviously be really bad, and saying “£0.0m” would look even worse. Kicks and giggles only.

Gfinity (GFIN)

The company are involved in esports. They are loss making and profitability is dependent on a large improvement in gross margins (which have only just turned positive) and continued high revenue growth far in excess of their market. During FY 2019 they burned £3m of cash, virtually exhausting their resources. Post year-end they completed a successful £5m fundraise at 4.5p, well above earlier lows of 3.5p.

On first look this is not something that is likely to catch the Mello crowd’s imagination at this stage in its development.

Deep Matter (DMTR)

This company appears to be in the business of making tools to support the discovery and manufacture of small molecules and nano-materials. They made their first sales in August and so may prove too early-stage for many attendees.

Not Covered Here

I lack specialist expertise in resource stocks: Golden Prospect Precious Metals, Horizonte Minerals, Chaarat Gold Holdings, Petro Metad.

Pre-float companies have very scant information available about them: Internet Mobile Communications, B-North or Elizabeth D Bakes. The following are also believed to be pre-float: Evo, Fanzine, Paysme.

I believe these quoted companies are at the show primarily or exclusively to promote their products: The Share Centre, Advfn, IG Group, Polar Capital, WH Ireland.