Why a 15% fall could mark the right time to buy into the Versarien share price
After publishing its preliminary results for the for the year ended 31 March this morning, shares in advanced materials firm Versarien(LSE: VRS) immediately slumped 15% as investors digested the news.
However, after this initial decline, the Versarien share price has rebounded. At the time of writing, shares in the Cheltenham-based business are changing hands for 126p, down just 4% from yesterday's close of 132p.
Revenue growth is key
The quick recovery should not come as a surprise to Versarien watchers. Today's results revealed a loss for the year to the end of March, but this was broadly expected. Unfortunately, the loss of 1p per share was slightly larger than the loss of 0.3p expected on revenues of £7.6m. The good news is, Versarien beat on the top line, reporting sales for the year to the end of March of £9m.
In my view, this top line number is a better reflection of group performance for the period than EPS.
Versarien is working to become one of the world's leading graphene businesses. As my colleague Paul Summers pointed out last week, year-to-date the company has already signed numerous deals across the globe with partners to help it reach this goal. In total, for the year to the end of March, it signed eight graphene application collaboration agreements, and since the end of March has signed a further five with "more in the pipeline," according to today's release.
As well as investing in these partnerships, the group has also funded new production equipment to scale up production of graphene at its facilities in the UK. This hasn't come cheap, but I believe it is money well spent.
Even though the market for graphene products is still relatively small today, studies suggest the industry could be worth $1bn globally by 2025. By investing in its business today, Versarien is priming itself to grab a significant share of this market over the next five years.
However, while I'm not worried about its profitability (or lack thereof), I am concerned by cash burn.
For the year to the end of March, the group burned through approximately £2.5m in cash. After raising £2.9m in November, at the end of March, bank balances totalled £2.3m, which management believes is enough to meet obligations for the next 12 months. In reality, the longevity of this cash reserve depends on how quickly Versarien can achieve cash flow profitability. City analysts expect the company to report an accounting profit for the year ending March 2019 so, so it looks as if the reserves will be enough, but there's not much margin for error here.
Still, with shares in the company flying high, Versarien should be able to raise new funds from investors to keep the lights on if it runs into trouble over the next 12 to 24 months.
The company's exciting potential has undoubtedly attracted my attention. The recently reported breakthrough in incorporating graphene nano platelets into power storage devices, increasing the storage capacity of batteries, could be a multi-billion dollar opportunity for the group. This would make a relatively small £3m fundraising seem insignificant in the long term.
So, considering all of the above, I believe that today's decline could present an excellent opportunity for risk-tolerant investors to buy into Versarien's growth story.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.