SES-imagotag/Gotham: racy pricing helps short seller inflict shelf harm
The path back to a premium valuation will be tricky even after a detailed riposte
Mockney wheeler dealer “Del Boy” Trotter was known for his French language faux pas and council flat in Nelson Mandela House, London. By mere coincidence, SES-imagotag resides in Nelson Mandela Place, Paris.
Its detailed counterblast against claims made by short seller Gotham City avoided any gaffes in English. But they will not leave international investors comprehensively reassured.
The riposte from the internet-of-things company reduced rather than wiped out a drop in the shares of almost 60 per cent at the end of last week. Gotham says revenues and ebitda are overstated. The path back to a premium valuation will be tricky.
SES makes and sells electronic shelf labels for retailers.
They are a handy way for brick and mortar shops to digitise. Sales have exploded in recent years from €250mn in 2019 to a forecast of more than €800mn this year. SES’s compound annual growth rate of 27 per cent easily beats listed peers Pricer of Sweden and Korea’s Solum.
Gotham says related party transactions boost SES-imagotag revenues via a circular chain. The company strongly denies this.
Aggressive accounting policies do not help SES’s wider cause. The company capitalises a lot more of its research and development spend as a share of revenues than Pricer.
Free cash flow remains negative and fails to reflect ebitda growth in recent years.
SES blames large investments.
The cash shortfall should be a red flag for shareholder regardless. Similar complaints led by short seller Muddy Waters hit the highly-valued shares of legal financier Burford in 2019.
Before Gotham’s attack, SES shares had risen fivefold in five years. On a price to sales multiple SES’s valuation was at a substantial premium to peers and well above the gap applying to price to earnings multiples.
Del Boy’s ride was a Reliant Robin, a vehicle famed for overbalancing when manoeuvring at speed. Something similar has happened to SES. Gotham’s more lurid claims are disputed. But SES’s accounting has clearly been too racy. The price correction is merited.