In my earlier post, I’ve shared my view on the dubious transactions that propelled Digimatic Group’s valuation from just 3m to 270m on IPO in 11 months. Since then, the share price has crashed by 65% to 0.14 now, which, in my opinion, is still overpriced.
Digimatic has just released its FY16 results. Revenue 9.1m, PBT 1.1m, net profit 1.02m and net profit attributable to shareholders 856k. At current market cap of 95.7m, the P/E is > 100x!
Source: Company’s FY16 accounts
The net profit has included waiver of loan from shareholder 520k. This should clearly be removed from the operating profit, resulting in 336k net profit attributable to shareholders. We are looking at adjusted P/E of 280x! There are other adjustments that we can make to the financials, but we can stop at here as they won’t bring the valuation anywhere close to the market cap.
With the net profit at such a low base, it can swing wildly from year to year. If it secures a big contract from one or two big advertisers, the revenue and net profit could look markedly different next year. But, current market cap has grossly overvalued its growth potential (if the growth potential does materialize at all).
Champion Star United Inc (CSUI), who paid 14.5m to buy part of Digimatic’s shares from 8I Holdings, holds 155.14m shares of Digimatic now. These shares are now worth 21.7m, achieving a return of nearly 50% on the initial investment in slightly over one year. While CSUI looks like a winner, it actually has difficulty to sell the shares because Digimatic’s shares are very illiquid. Anyone who wants to sell the shares now will drive the price lower by several percentage points. The paper profit of CSUI could evaporate when other shareholders realize how overpriced the shares of Digimatic are and start selling them.
I’m curious who CSUI really is. If it has experience in corporate transactions, it couldn’t have bought the shares at such overpriced levels, twice! Being incorporated in 1982 in British Virgin Islands and having no other public information makes it even more dodgy. All these red flags and overvaluation tell investors one thing: stay away from it.