Intercede shares received a hit recently when the company announced a share placing. Shares in the identity card management software (CMS) group enjoyed a strong run from a low of approximately 15 pence in May 2005, to an intraday high just shy of 80 pence in November 2006. The celebrations didn?t last long however, as the shares pulled strongly back on profit taking. Then, in May investors were taken surprised by the low price of a small placing of shares with a few institutional investors. The good news was that Intercede didn?t dilute current shareholders very much, only raising £700,000 after expenses, which represents 5.9% of the enlarged issued capital.
Investors were upset by the price at which the fundraising was executed ? 33 pence. This represented a whopping discount on the prevailing share price in the two weeks prior to the placing which, quite reasonably, annoyed several long term private investors who were hopping mad as they would have been willing to pay more than 33 pence to be involved. Unfortunately, well-intentioned regulations in the UK can make it extremely difficult for small private investors to get involved in fundraisings. Instead, the pickings tend to be left to large institutional investors who have the inside track and can drive a hard bargain, with micro cap companies like Intercede.
It?s a frustrating situation.
Most institutional investors have rigid restrictions on how much they can invest in companies with nano or a small market valuation, which means the choice of funds for a PLC like Intercede is usually quite limited. At the same time institutional investors can cause two major problems for smaller companies. Firstly, the institutional investor tends to hold a considerable amount of stock which has a disproportionate effect on the share price if it chooses to exit its position ? which can take months of drip feeding into the market ? often referred to as a ?stock overhang?. The second major issue is liquidity. Small cap companies often suffer from low levels of stock changing hands each day. This is thanks to a few shareholders holding most of the equity, and secondly, the much-loathed market makers tend to operate a wide spread (the difference between the price to sell and buy) which discourages new investors from entering the share. In other major stock markets around the globe, the share price is not set by a market maker alone, but instead by the highest bidder available and the lowest seller in the market ?the spread is actually dictated in other major markets by actual investors - fancy that!
This is a moot point and something that Proactiveinvestors finds particularly disappointing. FSA regulations are designed to protect retail investors from being mis-sold products or advice. The unfortunate side effect is that FSA regulations make it exceptionally difficult for a company to offer private investors stock in a secondary placing. The result? Companies like Intercede have no choice but to approach institutional investors or a private client broker for fundraising, thereby sidestepping many of the very investors who have strongly supported the company for years.
Sound bites from Intercede Group have been increasingly positive about the future potential of the business. The company is a developer and supplier of software for smart card and identity management systems through its MyID platform. The groups main competitor is Actividentity ( https://www.actividentity.com ) who are a vastly larger outfit. Sales for the year ended 31st March 2007 were up 22% to £2.6 million (2006: £2.1 million) with gross margins increasing to 97% (2006: 95%) and operating losses narrowing slightly to £338,000 (2006: £344,000) and loss per share of 1.1p (2006: loss 1.1p).
This may not sound terribly exciting, but Intercede?s share price is driven by the emerging market for ID cards around the globe and several high profile contract wins, particularly in the United States, where Mr. Bush enacted the Homeland Security Presidential Directive 12 which sets out standards for Personal Identification Verification for civil servants. This directive in turn has created a plethora of contracts for Intercede?s MyID platform, which is sold through several channel partners including Athena Smartcard, Gemalto, RSA Security, SafeNet, Thales and Verisign. Contracts in the US include the Executive Office of the President, Department of Education, Department of Interior, Environmental Protection Agecny, Federal Trade Commisssion, Federal Housing and Finance Board, Housing and Urban Development, and Social Security Adminstration. Intercede is also involved in bids for US Transport Worker Identity Cards and First Responder Authentication Credentials (for the fire, ambulance, police and support staff involved in crisis and major disaster incidents). Intercede receives a royalty for every card produced that includes its MyID platform, which explains why the company is able to post high gross margins ? it is, in effect, a royalty business. The vast majority of its expenses are cost of sales ? i.e. providing support to re-sellers who must cater ID cards to the particular need of the buyer. The ?cost of sale? tends to be an expense that Intercede has to bear, as it is part of the ?pitch? to generate contracts. However, once a contract is won, Intercede can build impressive earnings visibility and recurring revenue streams as an integral part of bulky, long term contracts to major government and corporate organisations.
Intercede?s penetration in the US appears to be going very well, and the company is keen to stress that as it builds up contract wins, it is becoming less reliant on a few key contracts to provide revenues. The company has also had success in Europe and the Middle East, and is emboldened by research suggesting that the global market for Personal Identification Cards will increase from $4 billion in 2007 to $20 billion by 2020 offering substantial potential. Closer to home, Intercede has contracts with Barclays, Lloyds TSB and the National Health Service. It also anticipates additional opportunities with the 2012 Olympics in London and the Labour Government?s continued drive to introduce personal ID cards.
Intercede has made considerable progress over the past 24 months, and as governments increasingly adopt new regulations regarding identification of civil servants first, and the wider public second, there is oodles of opportunity. However on the flip side, Intercede has only recently stated that it is cash flow positive, and despite the shock at the price of the recent fundraising, the last interim statements showed that the company only had net cash of approximately £400,000 which was still burning a hole in its pocket. The group also has liabilities in the region of £1.7 million, which was recently refinanced to extend the payment deadline until 2009. The major concern with Intercede is the lack of underpinning to the market valuation. With a small cash pile and debt on the books, Intercede could be knocked sideways if it were to lose one or two material contracts ? a substantial risk ? though it is working in a rapidly developing sector which makes the potential noteworthy.