'Jam Tomorrow' stories

Wednesday, 30th August 2017 07:48 - by David Harbage

So-called because these are businesses which are currently unprofitable but have the potential to earn a lot of money. This blog tends to leave the bulletin boards (described more politely on LSE.co.uk’s website as ‘Share Discussion’) to focus on start-up or loss-making companies.

We prefer to comment on more established stock exchange listed firms who have a track record of profits (and, ideally, dividends):  i.e ‘jam today’ stories. However, the writer makes the occasional exception and two such corporate mentions over the past eighteen months merit a re-visit – prompted by an update today from BlueJay Mining.      

But first, turning to our blog dated 9 March 2016 entitled ‘Housing: stock market newcomers’ in which we looked at the prospects for online estate agent Purplebricks. This embryonic business had listed on the Alternative Investment Market (AIM) less than three months previously at 100p and, encouraged by support from Neil Woodford (taking a 42% stake) and other heavyweight institutional fund managers (Old Mutual, Artemis & Fidelity taking another 16% in total, the shares of this loss-making start-up had progressed to 127p.

Buying or selling residential property has always been an expensive (thinks stamp duty or expenses) and the prospect of the digital changing the process is an exciting one. For instance, the emergence of web-based Rightmove providing potential buyers with easy sight of the available marketplace; the FTSE250 index constituent makes its living from listing estate agents and their properties on its website, as well as earning additional revenue from related advertising.

By contrast, Purplebricks, is itself an estate agency – but without the high overheads of operating from a building on the high street – charging a deeply discounted commission (average income £1,035 per sale last year) and operating via 448 ‘local property experts’ in the UK, backed up by an online progress trail. The model extends beyond these shores: operating in five states of Australia – where it appears to be ‘hitting the ground running’ (current figures suggest a faster pace than was the domestic case) – and due to launch in California in the second half of this year.  The full year results, to 30 April 2017, announced on 29 June show a raft of impressive growth figures – featuring a break-even at the operating level in the UK – and great expectations for rolling the business plan out further in 2018.

Purplebrick shares are unlikely to achieve genuine pre-tax profitability until the year ending 30 April 2019; current consensus of five brokers suggest earnings per share (EPS) of just 1.7p, with little prospect of a dividend before 2020. It should be noted that the projected finances of ‘start-up’ businesses are particularly difficult to analyse and there are a wide number of factors that will influence this company’s success. These include the state of individual property markets (economic health, ease of trading), competitive threat from existing agencies and online peers (integrating online peers) and maintaining reputation (retaining and recruiting quality staff).

The shares have risen from 127p eighteen months ago to reach 446p at the time of writing, which puts a market value of £1.2bn on the equity of a company that has yet to break-even in financial terms. Enterprise is a little lower with circa £70m of net cash on the balance sheet, post a £50m cash raising exercise in the spring to fund the launch of the US initiative. Taking a profit on shareholdings is never wrong, and those brave enough to invest back in March of last year should consider selling 30% or so of their exposure – leaving 70% which can be viewed as ‘procured for free’. Investors should continue to closely monitor Purplebricks – both in terms of the company’s progress, its valuation (set to remain demanding for the next three years, at least) and the worth within an overall portfolio of stock exchange assets.            

In a blog dated 11 April 2017, entitled ‘Diversification and the early bird that catches the worm ‘, discussed the merits and methods of owning a wider range of assets including gold, oil or other commodities – before illustrating an early stage explorer Bluejay Mining. Today, after announcing interim trading results last week this AIM listed owner of a potentially rich resource of titanium provided an update of its exploration efforts in Greenland. The company has been diligent, and unashamedly bullish, in advising the market (existing and prospective investors) of how it is planning to extract value from its self-proclaimed ‘world’s highest grade mineral sand ilmenite project’. The shares had progressed from April’s 12p level to 19.5p before today’s announcement – which valued the company’s equity at £149m – on the back of improved liquidity (post the placing of Western Areas’ near 20% stake, which makes the shareholder base more UK-centric) and heightened media exposure. 

Bluejay‘s latest update advised that exploration drilling had been very encouraging to date, and that further sonic drilling would take place at its Pituffik titanium resource in the second half of the year to potentially increase the size of the resource. A 250 tonne shipment of ilmenite-rich material has been shipped to Australia for testing, to meet customer acceptance criteria, and surveyors have confirmed that bulk carriers can reach and moor along the coastline. In the final quarter of 2017, survey work will begin and be completed on its nickel, copper & platinum (known as Disko) project in south Greenland.

Much of the above had already been anticipated by the market and some investors top-sliced their exposures at 20p in early trading. Bluejay CEO Roderick McIllree reiterated the objective of commencing commercial production in 2018, which in turn would facilitate self-funded exploration of current projects and future acquisitions in a region management knows well. In terms of determining progress towards that goal, investors will be keen to hear when an offtake partner has been signed up, with a view to gaining greater transparency on the business case.

The potential size of the core project could increase significantly – via newly discovered, extensive high grade (80% ilmenite) - and might attract larger, cash-rich miners looking for new opportunities. While not as exciting as gold or silver, or as industrially understood as copper or iron ore, this business merits a close watch. With only two company brokers proferring a view (SP Angel puts a valuation of 24p on the equity), investors are going to have to make their own calculations of Bluejay’s  prospective worth. Assessing the nature, demand and price of titanium dioxide (by perusing sites such as ICIS) represents an interesting exercise which includes both positive (supply challenges) and negative (TiO2 may have carcinogenic properties).               

Notwithstanding the helpful level and frequency of Bluejay’s advice to the market, it will be much more difficult to assess, and form a confident view, on the worth of this start-up miner – as compared to the online estate agent. News flow for both businesses is likely to be supportive and maintain investor interest and momentum in the share price. But, ‘buyer beware’, the elevated valuation of both already implies significant future success and prompts the wise investor to book a few profits (“leave a bit for the next investor”) and ensure diversification (that they never place “too many eggs in the one basket”).

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.