“I don’t understand it, Tom! We have taken more orders this year than in the whole of 2009 and 2010 put together and yet our share price still doesn’t move! What have we got to do?” So complained Wayne Money, chief executive of Eruma (ERU), to me last week. I can understand his frustration. Eruma has turned in some very impressive figures so far this year.
But then again – when you consider its history, it is no wonder that investors are wary. Eruma has done almost everything it can to upset its investors. For students of penny shares, Eruma makes a pretty good case study.
Because, while most investors will stay away, they could just be missing a real opportunity.
How Eruma earned its ugly reputation
Eruma came onto Aim six years ago with a plan to sell its unique security blinds. This is a really smart product. Although they have the appearance of vertically hanging Venetian blinds, these blinds snap instantly shut in the event of an explosive blast creating a steel wall that stops flying glass. They have been tested, they work, and they could save lives as well as preventing a lot of collateral damage. In a world that is certainly not getting any safer, they seem like a good idea.
And yet over the last six years, Eruma has done just about everything to deter all but the hardiest of investors. It has never made a profit. In fact, its accumulated losses in that period exceed its revenues. Its published statements have been littered with subsequently unfulfilled expressions of confidence, as well as dubious excuses such as bad winter weather.
It has also made mistakes in that time – diversifing into the Illuminex lighting business, an acquisition that made limited business logic and immediately ran into the headwinds of the recession. There have been changes at board level and the whole rickety vessel has been kept afloat by a series of share issues. In short Eruma has over promised and under delivered and to be fair to Wayne Moneyn he would be the first to admit as much.
Eruma suffers from two other problems as well. With a stock market value today of just over £1m it is far too small for City institutions to bother with. And the business relies upon winning a series of new contracts, with little if any repeat earnings.
That is the case for the prosecution and it is not unfamiliar to watchers of penny shares. Without exception, companies take longer to reach profitability than they say it will and it always costs more money to get there. The sensible investor does not take too much notice of promises. But, he should take note of firm contracts.
But this is why Eruma is looking interesting.
Eruma is headed for profit this year
Since the start of 2011 Eruma has announced contracts worth £1.87m and the nature of them suggests that more could follow. On the lighting side it has won contracts with a hotel group and a private medical facility, but also with a police authority, a school in Essex and two National Health Service facilities. We hear often enough about the need to save money in the public sector and it looks as though the fish are starting to bite.
Originally advertised as an emergency lighting business and thus vaguely synergistic with security blinds, Illuminex is now winning business on the grounds that it can save money. Last year it helped Bristol Airport slash its energy bill for lighting by 45% and cut its annual carbon emissions from 1,350 tonnes to 700 tonnes. With saving money and protecting the environment both at the top of the public sector wish list, it is no surprise to learn that Eruma is negotiating on several other contracts.
Meanwhile, Eruma has struck its biggest ever deal for its security blinds. In a contract worth £1.1m, it will install these on the five hundred windows of a foreign government embassy in London – that works out at £2,200 per window by the way. And, it has also won a £400,000 deal for a financial institution in the City.
Where these customers have led, others could very easily follow. Money thinks that Eruma could turn its first profit in the second half of this year and get there without having to raise any more equity capital. That could transform the stock market’s view of Eruma.
Suddenly, it could be seen as a supplier of very innovative products that are in tune with the times and could sell anywhere in the world. Investor perception is crucial – and it can flip very suddenly.
Why I invest in penny shares
Eruma has a number of qualities I like in a penny share. It’s ignored by City institutions. It produces innovative products. And it holds out the potential for outstanding returns for early investors. It could be a great penny share.
• This article is taken from Tom Bulford’s twice-weekly small-cap investment email
The Penny Sleuth .