No matter how good a stock picker you are in this investing game, occasionally along the way you drop a clanger and I for one have certainly endured a few myself over the years. Whether that comes in the form of failing to spot a red flag, being struck by an unexpected profit warning, or just getting it plain wrong, such investment decisions can often prove costly. That appears to have been the case for sometime now with my highly speculative punt in AIM quoted recruitment minnow Nakama (NAK), although perhaps, just perhaps, there is life in this old dog yet. Let me explain if you care to stick with me, as if nothing else it is an interesting story, that despite my anticipating a conclusion for what seems an age, it does now appear to be closer to hand. Nakama operates here in the UK under its Highams brand based in London, along with operations in both Hong Kong and Singapore where the focus spans financial services and digital technology, areas that are actually now proving more resilient across the recruitment space. The company came into being back 2011 via a merger of Highams with the Nakama business that was then based in Australia and which accounted for a substantial amount of the total business which recorded revenue of £22.5m in full year 2017. It is fair to say though that over the subsequent years as a quoted business NAK didn't exactly cut it, with profit being hard to come by and the share price reflecting that with a pretty woeful performance. By mid 2017 however, there was something of a potentially seismic shift when a private recruiter and consultancy business in the shape of Sheffield Haworth led by founder Tim Sheffield took a 24% stake in the company by purchasing a couple of lines of stock at circa 1.8p per share. The following months saw existing Directors at NAK departing, including CEO Rob Sheffield (no relation to Tim Sheffield) whilst Andrea Williams a seasoned recruiter was drafted in to head up the company, which also saw Tim Sheffield stepping in as Chairman. Cost controls and a big shake up within the business were instigated which also saw an exit from Australia, after the operations there appeared to be in something of a financial mess. Along the way, following Sheffield Haworth's taking a stake, I decided on a speculative position at 1.4p, on the basis that a reverse takeover was looking increasingly likely and the Nakama business actually had some quality clients and scope for growth, if it could be leveraged. I made contact with Williams on a couple of occasions and came to the conclusion that taking the business private was not on the agenda and I subsequently added to my holding at differing prices, thus building up a reasonable holding. After seemingly getting the business back on track though and the shares rallying to 1.7p, there came another twist in the story when a second private recruitment company First Point with annual revenues of $80m acquired a 29% holding at 0.8p per share. This appeared to have come completely out of the blue and seemingly wrong footed Sheffield Haworth, which saw First Point apparently purchasing the shares of former Directors such as Rob Sheffield which resulted in it becoming the largest holder. Following this intervention there subsequently appeared to be an impasse with the two majors, which eventually saw Williams move on and a new CEO in the form of Rob Thesiger stepping in. Thesiger, like Williams, has a strong track record in the industry and quickly installed his own disciplines which was to take the business further forward and return it to profitability. But, nothing has been simple at Nakama and the subsequent protests in Hong Kong last year followed by the onset of the pandemic saw the business being seriously squeezed again, the company putting out a statement earlier this year that it was in urgent need of an injection of cash. It seems that a fund raise my have been possible, but was apparently dismissed and resulted in the current situation which has since seen it bumping along, the head marginally above the water. Under most circumstances I wouldn't get involved in such a speculative proposition and certainly not to any great degree as I have done here and where I continue to hold. Having enjoyed an excellent run on the vast majority of my investments, I decided to see this one out, as the losses could even come in handy, although I could well have installed a stop loss had I wished to greatly reduce exposure to such potential losses. As it is and although I have been saying this for sometime now, it does look as though something is about to give here, certainly sooner now rather than later. The company last month announced a Trading Update to the market which was unusual, given that the results were already overdue and were expected to be released by the end of August/early September.
In that announcement NAK stated that revenues would be down 28% to £9.72m, but that the cash position was currently stable and the group is able to meet its obligations as they fall, with cash standing at £307k against the March position of £189k. There was no mention of the net fee income which is the important measurement across recruitment. With a current market cap of just £750k, it is obvious that something now has to give, as it seems absolutely ludicrous for one so small to be quoted at all.
The listing itself is probably worth circa £600k alone, so the situation appears as ripe as ever for a reverse take over by one or both of the major holders if a listing is desired, or even another entity looking to come to the market. Although to date nothing has yet transpired, this surely cannot go on indefinitely as the business is shackled, unable to grow being seriously constrained by a lack of cash. With the shares at 0.6p any raise would see a massive dilution, so doesn't look a particularly attractive prospect and to get it away there would surely have to be a serious discount on offer. However, a reverse take over by one of the main players here which appear to be sound and decent businesses would provide serious upside potential, as too would another successful and acquisitive private company stepping in.. The shares here are actually quite tightly held which sees Ken Ford Chairman of both SDI and G4M who is a person I hold in high regard sitting on a 4.2% holding, whilst very recently private investor Barry Reynolds has amassed a 9.5% holding after repeated buys throughout September. I suspect that Reynolds is no fool and like many seasoned investors surely doesn't throw money away on a whim, so this in itself is arguably an interesting development, although I am sure he is obviously aware of the highly speculative nature of this one. And of course, all the signs out in the market are that this is a seriously risky punt and the odds do appear stacked against it, which could see shareholders investments proving totally worthless, should the business fold due to a lack of cash. But, despite that being firmly in mind, I actually suspect that at long last there could well be some action going on behind the scenes that would provide for a way out of this current bizarre situation and actually bring closure or future upside potential. Neither of the majors have sold shares or for that matter added, where if First Point was to increase its holding, it would almost certainly trigger a mandatory bid for the remainder of the stock. Despite looking a sickly business from what we know, Williams and Thesiger seem to have cut away dead wood and shifted the business into potentially more lucrative areas, where if the balance sheet was strong it would actually see the business well placed to thrive and grow as the global economy edges forward from the current pandemic.
Thesiger has informed me that he has been and is pursuing a number of areas to underpin the finances and any positives on that front would provide for a much needed boost for the shares.
Time will of course tell as to how this is going to finally play out and thus provide a long awaited answer to long suffering holders in what is proving to be something of a conundrum.
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