Is RM2 INTERNATIONAL, a wealth destroyer or got listed too soon?

Shares in RM2 International (LSE: RM2.L) has been wrecking havoc on shareholders’ accounts. The stock price collapsing from 88 pence to less than 20 pence.

Although it got listed on the AIM market, RM2 raised large amounts from its IPO in early 2014.  Total net proceeds were £130.8m, which values the business at £278.3m. Today, the Market Cap. stands at £76m.

 

Why has RM2 took a hammering?

It simply failed to make money and burn a lot of cash too, period! With these two facts, investors would be sceptical on any announcements. Even if it’s a credible partnership.

Chart 1

Here is a chart that tells the whole story of RM2’s share price:

RM2 INTERNATIONAL CASH AND SHARE PRICE

The correlation between cash and share price is like two “star-struck” lovers, inseparable!

What does it do?

It describes itself as “A global, vertically integrated innovator in pallet design, manufacture, supply and logistics management.”

What the company said about their breakthrough technology BLOCKPal, as “It engineered composite pallet presents significant weight, durability, hygiene, handling and life cycle advantages for superior economics and sustainable performance.”

(Yes, all the right keywords to say they make wooden pallets!)

You do know a wooden pallet is “SUPER CHEAP” to buy, even in places like eBay!

 

Tearing Apart RM2 International Financial Statement

Despite the £130.8m equity placing, cash has crashed to $4m (See Chart 1).  

 

P&L Account

With the lack of profits and revenue, you can come up with some interesting observations.

First, guess which line is the revenue.

RM2 International revenue and COGS

Yes, the red line.

Interpreting the chart, their admin. Expenses are twice as high as their revenue. The cost of sales rose in a straight line, and is 5.5 times larger than Sales!

So, it isn’t rocket science when the accumulative operating loss (since 2013) totals $134m, or £108m. By including their 2016’s interim, that loss rise to $157m.

 

Balance Sheet

The company looks to be building up its inventories of pallets.

Inventories turnover period in 2014 and 2015 is 118 days and 162 days, respectively.

Studying the composition of RM2’s inventory they held $7m worth of finished pallets against $8m in sales.

2016’s interim showed finished pallets rose to $13m. (Possible sales in 2016 comes to $15m?)

That explains why property, plants and equipment rose from $14m to $58m in two and a half years. It’s to expand manufacturing and store finished pallets.  

By aggressively building up its inventories, RM2 distorted their cash cycle. Actually, it improved from 747 days to 448 days between 2014 and 2015. But, 448 days is more than a year, then the products aren’t flying off the shelves.

We wonder what 2016’s cash cycle will look like?

 

Cash Flow

Add together net cash earnings and net investing cash for 2014 and 2015, you get total cash outflow of $157m! Include their latest interim cash outflow of $30m, then this totals $187m. The problem is within 2 and a half years, the equity proceeds have disappeared!

 

Management Pay

Starting with the numbers of directors that total 9 board members. They got six independent directors who aren’t doing their job and costing shareholders a few million. Details of remuneration are:

In 2014, Total Executive pay is $900k and Total Non-Executive pay is $563k.

In 2015, Total Executive pay is $717k and Total Non-Executive pay is $453k.

For a company losing $30m-$40m per year, it is woeful they haven’t passed up their pay package. Until the business operations are operating at full steam. Instead, the management pays themselves too much and shareholders are sitting on losses.

 

 

Operation between latest interim and now

Since their interim results, they have announced a significant order agreement. It is an order for hundreds of thousands from Pactiv LLC, a subsidiary of the Reynolds Group Holdings Limited. (Reynolds bought Pactiv LLC for $6bn in 2010) That’s one way to I.D. a big corporation.

It is good news for RM2, but the lack of financial details and share price movement doesn’t fill me with confidences.

Sure, RM2 can be telling the truth.

Sure, it can deliver the orders.

But, at what costs? More precisely, are costs going to exceed revenue when implementing this order?

If yes, then RM2 is a loss-making entity and won’t make a penny in profit!

Business example

For example, if it costs £1 to make a cup of lemonade, and you sell for 90 pence, you make a loss of 10 pence. But, if you sell the same cup to a million customer, then your loss would balloon to £100,000!

So, having lots of orders are useless to the owner of a business, if it exacerbates their costs.

 

Surprise, Surprise

I’m not talking about Cilla Black (may her soul rest in peace), but Neil Woodford (the famous fund manager that used to head Invesco)

Since leaving Invesco, he set up his own fund called CF Woodford Equity Income Fund and fund has bought RM2’s stock.

In 2015, Woodford bought a 21% stake. And when the company did a placing of £30m, Woodford subscribe for more shares taking his interest to 27%. Back then the shares were trading at 40 to 60 pence, instead of the current 19 pence per share.

So, Woodford star power didn’t help the shares of RM2.

Either, Neil Woodford got caught up with a fantasy business proposition or he is in it for the long-haul. I’m leaning towards the long-haul.

However, retail investors should realise Neil Woodford is speculating with other people’s money (as well as his own). Also, he is super busy and might miss some research on the pallet market.

Or, he’s been in this money fund business far too long and needed a break.

 

Final Thoughts

For me, it took me ten minutes to reach a decision on RM2 business. (Writing it up took longer! BTW) The following things are what investors need to know: –

  1. It has one product and that send the risk and reward to stratospheric level! If this product fails to sell at the RIGHT PRICE and be profitable, then it is a failure.
  2. Looking at the cash and share price pattern, along with the cash burn, it needs to raise money. Money that will increase financial risks (debt) or dilution to the share price (Equity).
  3. For a pallet with an electronic tag, it seems to burn a lot of cash. I don’t know the business inside out, could this possibly cost less?

 

I can’t help but describe their pallet, as something like an electric toothbrush!

Whichever outcome you agreed upon, there is one undeniable truth that it to raise a lot of money. That is why the shares are coming under pressure. If you factor in the period it will need to make money, then the shares won’t go anywhere.

 

Hope, this piece is informative and enjoyable to read!

What are your thoughts on this stock?

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Disclosure

The opinions expressed by the writer is for entertainment and research purposes. It does not constitute professional investment advice. Data is correct on available information at the time.

Finally, the writer does not own the company’s stock, unless stated otherwise.