Sunday, 22 January 2017

Thin Float Stock Spikes On 140% Increase In Revenue

Trading in Delta Technology Holdings Limited (DELT) spiked significantly last week after the company reported a 140% increase in revenue from $8.6 million in the quarter ended December 2015 to $20.5 million in the quarter ended December 2016. The stock closed at $0.87 on January 18th, rose 95% to $1.70 on nearly 20 million shares traded on January 19th and settled down 10% on January 20th to close the week at $1.54. We believe that this is an opportune time to pick up shares after the pullback on Friday as the stock appears to be recovering from an extremely oversold state, the business is recovering and it is trading at a market cap well below its working capital and book value. There are only 9.6 million shares outstanding and a 2.2 million float according to Yahoo Finance so this stock is ripe for more heavy gains especially in light of recent moves made by stocks of similar float size like ETRM, SGNL and GLBS.

When DELT first started trading it was over $20. This is a real price as there has never been any reverse splits since listing. Now with several pieces of good news, as evidenced by the three large white bars seen since June, it looks like the stock is on the verge of a turnaround.

What caused DELT to crash so violently from over $20 to less than $1 in a year? Reviewing the financials filed with the SEC is a good place to start. Revenue was $202 million and EPS was $1.44 for the 12 months ended June 2015. Revenue collapsed to $53 million and EPS to -$1.46 for the 12 months ended June 2016. However, there is still tremendous value in the company with a $107.3 million working capital and $45.5 million book value while the market cap at a $1.53 stock price is only $14.5 million.

If the company was continuing to shrink, a working capital amount that is more than 7 times higher than the market cap and a book value that is 3 times higher might not be too interesting. But with revenue having gone from $8.6 million to $20.5 million in the last reported quarter, we can assume that a revenue run rate of at least $80 million will be had for the year ended June 2017. If a 140% growth rate can be maintained, revenue will be in the $120 million range.

In addition to the increase in revenue, DELT announced a multi-million dollar contract with Changzhou Tronly New Electronic Materials Co., Ltd., a company listed on the Shenzhen Stock Exchange under the symbol 300429. So we can expect the growth to continue. 

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