Member Info for Donatron

Some further musings from me in case anyone is interested (1/3)

Well done all those who have held on over the past week or so. In particular well done to those who, like me, are long-term holders that have been sat on paper losses but who are now in paper profit. It’s a good feeling after all this time!

Am still sat on almost 1.4m shares at 6.4p, so to have this holding now hovering around the £200k-£250k mark is a big step in the right direction.

Whether people sell or hold for the long-term is up to them. Clearly there is a lot of volatility, so there is money to be made in short-term trading. I can see the argument for top-slicing and if that suits your circumstances then by all means do it. Ideally I would buy into rises and sell into dips to keep boosting my holding at no cost, but I work in a regulated industry am therefore unable to buy and sell at will. I have to wait a month after buying to sell and vice versa, which is far too long to be sat on my hands.

I think this will be at least a £1bn company in the years ahead. Whether you agree or not is down to your view on i) whether the plant will be financed and ii) whether it works as intended. The potential economics are colossal, especially once they move on to plant 2, 5, 10, etc. The company have long made clear that repeating this model is their intention and that is when this really starts to get interesting.

On the first point, I think financing will be forthcoming for no other reason than it has to. The airline industry needs this to be built and they need it to be replicated, as they need the sustainable fuel and would struggle to operate in a world of emissions cuts without this. Any large plane powered by batteries is a long way off - and may not even technically be possible given the energy density of current battery technology. Even if this does happen, we're talking 10-15 years to design, test and build something that might actually be adopted. Electric cars are only just starting to gain mainstream traction and the barriers to their adoption are tiny in comparison. Imagine a plane that is loaded to the gills with batteries that then take 24+ hours to recharge. The technology and the economics will take a long time to stack up.

Part 2/2

The key thing with placings is that they aren't usually open to existing private investors and they are dilutive to current investors, even if they don't necessarily change the current value of your investment. You might think that the company in your example is going to be worth £1m in future. Pre-placing, you owned 10% of the company, so if the company was worth £1m in future, your investment would be worth £100k.

In both examples shown previously, you now only own 10k/150k of the shares in issue. When the market cap hits £1m, you now only hold shares worth £67k.

Another way of raising funds is through a rights issue. Easiest way to think about this is a placing to existing investors, i.e. a placing that you are also able to take part in. All of my previous examples still stand, except that this time you are able to buy shares at the placing price as well. I won't cover a rights issue at a premium to market price, as I don't think those happen in the real world (people could just buy the shares on the open market for cheaper than the rights price).

When buying at a discount, you can theoretically make "free" money by buying shares through the rights issue (e.g. at 75p) and selling on the open market (e.g. at £1). In reality, this would make the share price quickly move towards the fair value of 92p we worked out earlier (known as the theoretical ex-rights price or "TERP"). However, you are still able to make money by buying at 75p and selling at 92p, so this is a good trade either way. If the TERP dropped below the actual rights price then there wouldn't be any point taking part in the rights issue.

A good thing with a rights issue though is that you are stopping your investment being diluted. If you have enough money that you can purchase an extra 5,000 shares to ensure you still hold 10% of the new enlarged share capital. That would cost £3,750 (5000 x 75p), and the value of your holding would now be 15000 x 92p = £13,750. You are therefore no better or worse off than you were before, as you previously had £10,000 of shares and now you have spent £3,750 to have £13,750 of shares. If the company hits a £1m market cap then your investment would still be worth £100k. The only thing that has changed is you've had to put more cash in.

Recently VLS has tended to raise money via part-placing and part rights issue in tandem. If you believe in the company and you have the cash, buy enough shares in the rights issue to avoid dilution and you will be no better or worse off in the long term than you were before (albeit in the short term you'll have more cash invested and less cash in your pocket).

Part 1/2

Shares are usually issued through a placing, which is just the issuing of new shares to one or more new investors, usually institutional investors. By itself this is neither good nor bad, but depends on the circumstances.

If a company is perceived to be a good investment, the placing is likely to be above the current share price. This reflects the fact that, were the investors in the placing to buy shares in the open market, they would likely move the share price significantly above the placing price (given the large volumes that would be involved). The issuing company therefore agrees to issue the shares at a lower price to what the placing participant could achieve in the open market in exchange for the fact that it receives the proceeds. Recall that if the placing participant had bought shares in the open market then the company wouldn't have got any of the money.

How does this affect current investors? Continuing your example below, if the company issued 50k shares at £1.25, they've raised £62,500. The company was worth £100k before the share issue. If you truly believe that the £100k pre-placing valuation was correct then the company is now worth £162.5k, i.e. the £100k plus the placing proceeds. Divide by 150k shares and the fair value of the shares is now £1.08. Everyone has made a bit of profit, apart from the new investor, who is still happy because they've built a sizeable position in a company for less than it would have cost in the open market. Placings at a premium to current price do not happen very often.

If a company is perceived to be less of a "sure thing" then the investment is more risky for the purchaser and therefore the shares are likely to be issued at a discount. This is an inducement to persuade the purchaser to buy the shares in the first place.

How does this affect current investors? Again continuing with the below example, 50k shares at 75p is £37,500. The company is then worth £137.5k, which means the fair value of the shares is now 92p. Everyone has made a bit of a loss, except the new investor, who has already managed to make a gain of 17p per share.

However, what if the company is going to use the proceeds to fund positive NPV investments? In that case the £37.5k might actually be worth £50k to the company, in which case the shares are still worth £1 and the news of the placing might actually not move the share price at all. It's then not hard to see that this is totally neutral to investors from a market value of their shares perspective. It's also not hard to see that if an institutional investor can buy shares for 75p that are instantly worth £1, then another institution might offer to fund the placing at 80p and another might offer 85p and so on and so forth, until the placing price is very near the share price in the market.

Hmm, seemingly LSE is a lot fussier about links than II is. Anyway, you can find the article by searching for "Business Traveller" and then looking for the article entitled "Call for UK government support for sustainable aviation fuels". It was published on 2 June 2020.

Ran out of space in my first message. Here's the rest:

3) Just on the CQS point (recent RNS on divestment by their Directional Opportunities Fund), this is likely to be a red herring in terms of whether it meaningful, so I would caution against using it to justify lack of faith by institutional investors. I work for a hedge fund myself and can tell you that CQS have had a turgid March and April.

What is likely to have happened is that whoever took the position in VLS (and it's a tiny position given CQS manage $18bn across their various funds) has probably been sacked due to poor performance across their trading book this year. Many traders are being let go from hedge funds at the moment, either due to their own performance or because their funds are closing down entirely. Someone else, likely in the risk team, will have made the decision to liquidate any of the non-performing positions they left behind, likely knowing nothing at all about VLS. This is therefore not necessarily a reflection on the future prospects of VLS, but instead a reflection of the fact that the fund was sitting on a big paper loss and needed to de-risk.

Some broker then dumped the shares on the market in a short space of time. What is very encouraging is that the price actually went up while this was going on, so clearly there is demand for these shares when there is a backdrop of good news.

Anyway, enough from me. Goodnight all!

Have been a lurker here for several years, formally of the Interactive Investor board (now seemingly dead). For what it's worth I hold 1.4m shares (a little over 0.2% of the company) having first bought in back in the 98p days. I've been averaging down ever since, but am still sitting on a 6.4p average.

Thought I would finally register to mention a few points:

1) I just saw this interesting article from today that I can't see anyone else has posted:

https://www.businesstraveller.com/business-travel/2020/06/02/call-for-uk-government-support-for-the-sustainable-aviation-fuels-sector/

The group consists of almost every player in UK aviation, including UK airlines, airports, aerospace manufacturers and air navigation service providers (full list at https://www.sustainableaviation.co.uk/about-us/members/). They want matched public/private funding of £500m over 5 years (totalling £1bn) to develop flagship sustainable aviation fuel plants in the UK. A summary of their proposals is here:

https://urlsand.esvalabs.com/?u=https%3A%2F%2Fwww.sustainableaviation.co.uk%2Fwp-content%2Fuploads%2F2020%2F02%2FSustainableAviation_CarbonLeaflet_20200129.pdf&e=024c30db&h=4308b7fc&f=y&p=y

The full report is here. Pages 36-40 are the most relevant, with the Altalto project getting it's own feature on page 37:

https://urlsand.esvalabs.com/?u=https%3A%2F%2Fwww.sustainableaviation.co.uk%2Fwp-content%2Fuploads%2F2020%2F02%2FSustainableAviation_CarbonReport_20200203.pdf&e=024c30db&h=f9b2a0b6&f=y&p=y

This is clearly a powerful group and if any of that public money went towards the Altalto project then that massively derisks it from a financial perspective.

2) That said lots of people here would do well to recognise that this company is not a "sure" thing. If it were then the price would be many, many multiples of what it is now. There are still significant uncertainties around both financing and the waste-to-fuel application of the underlying technology.

Clearly I want the company to do well and am hopeful that these issues can be overcome/mitigated as appropriate, but lots of people are talking about 5p/10p/15p by and it's a bit fanciful at this point in time. With some steady news flow indicating genuine progress with financing then that situation could change very quickly (the market cap is tiny), but blind optimism helps nobody.

In Expat's defence, he/she raises genuine issues that several people are happy to either ignore entirely or just totally downplay. That said, they don't seem able to accept that there is a chance that Immingham and Natchez plants are actually built and operate well.

For me this is a 80/20 in terms of "could do well or could go bust". Hopefully that balance shifts if progress is made on funding.