#SED 7 - Facing risk

How best to manage risk?

Risky shares can lead to steep declines

Dear reader,

I’m sure it comes as no surprise to hear that some shares ideas are risky. Deep value typically means trawling the sewer for discarded gems, where unloved ideas hide. To find value in what others have discarded.

Or one can play it safe, investing into a fund, or an index. Follow the crowd in an index or pay a fund manager to follow the crowd by proxy. Or place the money in the bank to earn a few percent. Part of my portfolio lies in a global index plodding along.

At the end of 2023 I created the Oak Bloke Top 20 ideas for 2024. Two months in, one of these 20 suffers a catastrophe.

Including Saietta at 17p in my ideas for 2024 in December I said:

Saietta is my final growth play (and final sucker stock). We’ll see. World class technology as Renault’s Papa and Nicole would attest, with commercials in place, cash (partly) in place, and a partnership in the USA and a JV in India which will propel SED to greatness. It’s true that SED lost its way in 2023, and new management had to make some tough choices to cull overcommitments to different programmes. The cull is a reflection of their management quality and those opportunities are largely deferred rather than lost. Focus on its India JV and the singular problem of Urban pollution shortening peoples’ lives by 12 years will be the making of Saietta. Its progress and now its $366m contracts pipeline is nowhere in the price. I believe the share price at the end of 2023 offers exceptional value.

Do I regret saying that?

Saietta Customers learn the news

Yesterday’s news that Saietta was going into administration was a sad day. Sad for the 189 UK employees affected, many of whom are now on LinkedIn as I write “looking for a new opportunity”. Sad for the UK, that a world-class technology probably leaves our shores, to almost certainly one day return in its millions as a high-value import from India. Sad that there was no appetite to fund a business with £5m-£10m working capital, a business which was extremely close to cash generation and with a $366m order book. Culled for no good reason. Or perhaps deliberately culled in a smash’n’grab of the IP. After all in the March 2023 accounts it signed off its going concern statement. It had to raise funds, and of course in November 2023 did, and planned to again in Q1 2024.

It had enough money until the end of March but suddenly in the RNS 23rd Feb “witheld monies” suddenly created a shortfall. Did its JV subsidiary, Saietta VNA create the funding crisis? The March 23 accounts told us:

The Company has spent £3m on such equipment and this amount is to be reimbursed by Saietta VNA. In the absence of such reimbursement there may also be a need to raise additional funding.

SED’s Marine Engine Propel outperformed the Torqeedo in an independent product test - zooming ahead. Two Renault Twizzys raced and the one with a Saietta AFT was 10% faster. Those who say the product was not real, need to get real. You don’t get to play with the big boys if your technology isn’t real. They don’t commit to building vehicles if you can’t perform. Conmet, Padmini these are enormous Tier 1 Automotive OEMs. The administrator will probably sell the IP to Padmini (who own 51% of Saietta VNA) or one of the Indian OEMs. Perhaps a fight will break out to own the IP. Perhaps shareholders will get something back.

Tangible assets are 49% of the VNA factory in India and 100% of another in NE England. To the right buyer these could generate £5m. Intangibles i.e. the IP could be worth £5m-£50m depending on the degree of competition. As a going concern, potentially worth more still as the people and know how are clearly where quite a lot of value lies. The market cap was £290m at its Zenith. I tipped it at 17p so as a £24.6m market cap.

I acknowledged its prior CEO had launched into too many directions and new management had to cull programs and refocus the company and get cash generative. They were doing this. The market opportunity is real enough too. When you consider it from the 7 Ps - they had product (AFT, RFT, Invertor, Software, Propel), place (2 factories), promotion (OEM contracts in 3 Continents), price (product margin and licencing revenue), physical evidence, process and people (a quality management team).

Did they lack cash? Yes. Did I foresee dilution of 50%+? Yes. But simply not getting funding with the commercialisation at such an advanced stage leaves me gobsmacked. That’s not an easily foreseeable risk, in my opinion.

What lesssons can I learn? Can you learn? Perhaps I should have been much more paranoid as to the intentions of the JV partner? There were plenty of detractors of this share of course. But the detractors appeared to have a very limited understanding of the business and of the opportunity. Their noise was a braying “4 legs good, 2 legs bad” mantra and because this is an AIM stock and has had to do a raise it’s therefore doomed. It’s always possible to find detractors but if you do deep research then you can confirm their reasoning or affirm your decision to continue. Is it wiser to avoid any company with a forecast cash shortfall? Assume the worst? That strategy would have worked here.

But if I compare SED to BELL or TEK for example. TEK were seeking to IPO its Microsalt holding. Similarly cash strapped. It found a way by borrowing from one of its holdings, the float of SALT occured and was and is a huge success - the most successful IPO in the UK for a while. TEK was up 150% YTD a fortnight ago and is further discussed in TEK-king stock. On high beta shares you can lose once and gain many times over. AIM shares can gallop.

BELL, similarly cash strapped, and then reverse merges with TMTA and is on course to fulfil its $85m order book, and become cash generative. Tipsters who’d previously called this one a sucker, recently back peddled and said they didn’t know and the technology was interesting but they didn’t understand it. They could have been speaking about SED. And BELL could have been on the pyre.

So while I offer no advice and it’s entirely up to you whether you read what I write, I would like to apologise to any reader who read my SED articles and made their own decision to invest. The news from SED weighs heavily on me. It’s one loss and a net -5% for the rest of the year (assuming shareholders get nothing from the proceeds). The OB20 sits at -6% so -1% plus SED currently. A raft of dividends follow this month and remain optimistic for all my remaining ideas.

I write these articles for myself to help me affirm my own reasoning to be in a share - or not. We can learn from our successes and from our failures. A relentless focus on cash, and a Macchiavellian-level paranoia to red flag threats, to recognise traps, and walk away, appears to be the unfortunate lesson from SED.

This is not advice

Oak