Is the Versarien share price still cheap or could it cost you dearly?
I've written positively in the past about AIM-listed advanced materials firm Versarien (LSE: VRS) and FTSE 250 media sector group Ascential (LSE: ASCL). The shares of both companies have recently been hitting new highs. Are they still cheap at their current levels or could they cost investors dearly?
Digital economy
Ascential's shares opened 2.3% lower at 449p this mornings after the £1.8bn mid-cap released its half-year results. Nevertheless, they're up a healthy 33% over the last 12 months. Management said first-half trading was in line with its expectations and that it "remains confident in our overall 2018 performance and our prospects for continued success."
Closing net debt at 30 June was £285m but the group has since received a net £284m cash from the disposal of its exhibitions business to ITE. This provides Ascential with headroom to develop its other businesses via organic growth and acquisitions. These businesses are focused on information and analytics, and provide customers with the means "to win in the digital economy by excelling at product design, marketing and sales."
When I looked at Ascential last summer, the share price was 374p and the forward price-to-earnings (P/E) ratio was 21.4. At today's share price and on City earnings forecasts of 17p a share, the forward P/E is 26.4. This looks too rich to me for a company expected to grow earnings by 15% from 2018 to 2019 and with it also offering a fairly meagre dividend yield of 1.4%, I rate the stock a 'sell' at the current level.
Multiple collaborations
Versarien is currently lossmaking but is a hugely popular stock with private investors. Indeed, the three biggest holdings in the company are represented by the pooled investments of retail clients of Hargreaves Lansdown, Interactive Investor and Halifax Share Dealing.
The group has made five acquisitions since floating on AIM at 12.25p a share in 2013, three of which were revenue-generating at the time. The total acquisition cost for the three was £4.2m and in the year before Versarien bought them their revenues added up to £11.7m. Versarien reported total group revenue of £9m in its latest annual results, released last week. Therefore, I find it hard to value these businesses at much more than the £4.2m Versarien paid for them.
The company's shares are trading a little down from their recent high of 141p, valuing the group at £210m. As such, I'd say the other two businesses Versarien acquired are being valued at over £200m. It bought 85% of each company, paying £440,000 in one case and £170,000 in the other. These businesses are focused on advanced material graphene and Versarien has announced multiple collaborations and trials with partners in a variety of sectors. However, the agreements are short on detail at this stage, particularly financial detail.
It's reckoned the industry could be worth $1bn globally by 2025 and my Foolish colleague Rupert Hargreaves believes now could be a good time to buy into Versarien's growth story. I've previously been bullish on the company myself, when the shares could be bought at 10 times current revenue (my upper limit for this kind of stock). However, with the valuation now up to well over 20 times revenue, I see the risk/reward trade-off as having turned unattractive and I'm inclined to rate the stock a 'sell'.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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