I MUST confess to being rather puzzled by the proposed listing of RGT Smart, a research and data collection company focusing on the automotive sector.
Aside from the market being less than receptive to small cap listings at this delicate juncture, I find RGT Smart's prospectus rather underwhelming.
The Port Elizabeth-based company is looking to raise just R5.7m through the issue of 57 million shares at 10 cents per share.
Officially RGT Smart is looking to list on the AltX to enhance its profile and credibility, retain key staff and (this is the important one) "increase its capital base in order to take advantage of future growth opportunities".
I'm not sure whether raising R57m in new capital will provide enough balance sheet power to take advantage of future growth opportunities - especially when the pre-listing fund raising exercise will cost R1.6m (fees to accountants, advisers, etc).
I'm also not sure what "growth opportunities" are really available in RGT Smart's particular niche.
In my humble opinion, the real reason for listing is because RGT Smart - at this point - has a rather brittle balance sheet.
Whether R5.7m (less expenses) provides enough reinforcement to the balance sheet is perhaps the key consideration for potential investors. To put the R5.7m in some form of context, it may be worth noting that the net capital inflow from the listing would hardly cover last year's directors fees of R4.65m.
The company's half-year to end August "reviewed" results show current assets of R3.6m rather ominously overshadowed by current liabilities of almost R10m.
Puzzling dividend move
That, effectively, means RGT Smart fails the so-called acid test - an inability to settle its outstanding debt with available liquid assets.
With this in mind, I found it rather perplexing to see that RGT Smart then saw fit to declare a R4m dividend during the year to end-February 2010. Unless something dramatic happened in terms of profits (and cash flows) in the second half of the 2010 financial year, I would respectfully submit that the company really was not in a position to pay a R4m dividend.
And it's not like there are fixed assets that provide a reassuring backdrop to the balance sheet. Of RGT Smart's R27m in total assets, roughly R24m comprises goodwill and other intangibles.
Pro forma figures - reflecting the status of the company as at end-August with the listing proceeds accounted for - suggest that capital raised at listing will clear financial liabilities of some R2.9m (including loans from directors) as well as the R316 000 bank overdraft. This would leave about R1.7m cash in the bank.
But even then current assets of around R5m are still dwarfed by current liabilities of R6.7m.
With around 438 million shares in issue after the listing, RGT Smart carries a fairly sound net asset value of almost 8c/share. This may seem fair for a company that is long on "intellectual capital" and short on physical operating assets, but there is still something disconcerting about a negative tangible net asset value of -0.36c/share.
Of course, I am at risk of being shot down for harping on about value when many would argue RGT Smart should be judged on the merits of its highly specialised service offerings.
Fair enough. But the revenue and profit forecasts don't exactly set me all atingle either.
In terms of forecasts for the year to end-February 2010, the earnings number - a fractional 0.07c/share - is somewhat skewed by pre-listing share-based payments (that shave almost R1.5m off profits).
Still, there are pedantic punters that will point out that RGT Smart's pre-listing offer is being pitched at a very demanding earnings multiple of 142 times.
Those happy to pitch in at 10c/share will point out that forecast earnings for 2011 and 2012 are 1.8c/share and 2.09c/share respectively.
But that's the indeterminable future, and we have no five-year operating history in the prospectus with which to gauge how reliable a profit spinner (or, more importantly, cash flow generator) the two main operating components of RGT Smart have been over the medium term.
It's always great to see a new listing when the market's in a morbid mood, and I wish RGT Smart the best of luck in its endeavours. But I think I'll pass on the pre-listing offer.