Grape expectations crushed
DO SMALL UNLISTED venture capital companies “bullsheet” the public with over-inflated profit predictions to facilitate fund-raising exercises?
Do we offer the benefit of the doubt to executives of these companies, knowing that start-up ventures are so often beset by unexpected hitches that de-rail the best-laid plans?
Grape packaging technology group Vinguard, which came out of listed John Daniel Holdings, is a case in point.
Back in 2004, Finweek expressed some serious reservations about Vinguard, advising readers to think long and hard before committing hard-earned funds to the venture.
In its prospectus of 2004, Vinguard predicted revenue of R17m and earnings of R1,7m for the year to end-June 2005. These figures would grow to R53m and R9,5m respectively by 2006 and to R124m and R23m by 2007.
Based on these management forecasts, gullible investors would have happily assumed that by June 2007 the investment in Vinguard would have largely been paid back in earnings.
Not likely. Vinguard’s latest annual report for the 16 months to end-June 2006 shows turnover at a mere R4,6m and an ugly pre-tax loss of nearly R3m.
That is a million miles short of what Vinguard originally forecast ahead of fund raising, and – considering the longer reporting period – seriously questions whether management really grasped the challenges of the business. Upfront astute investors would have recognised that it’s an arduous task to break new grape packaging technology into a largely conservative customer base.
It would appear Vinguard is generating revenue of less than R300 000/month, which means that at this point we can safely throw out the original year to endJune revenue forecast of R124m. More seriously, will the business even make its 2005 revenue forecast of R17m this financial year?
Vinguard’s predicament is highlighted in a rather desperate looking cash-flow statement, which saw a R2,7m cash balance turned into a deficit of R1,1m.
We note that further shares (roughly 480 000 at 50c/each) were issued to raise around R240 000 in new capital and that an inter-group loan of R1,4m was also raised.
The balance sheet, however, remains puny – though current assets of R5,2m (including inventories of R1,6m) do cover current liabilities of R3,8m.
Directors admit there was “some initial difficulty in acquiring local market share” during the last grape season. Understandably, local producers felt they would prefer to first conduct limited exports before considering Vinguard as their first packaging sheet of choice.
Performance was also affected by Vinguard’s decision to penetrate as many international markets as possible, selling packaging sheets at lower margins.
When excitable investors pitched for Vinguard shares in mid-2004 they were effectively buying on a forward price:earnings multiple of 38 times. With no profits to show to date, shareholders must be seething over a seriously expensive investment exercise.