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Reach4Entertainment – It was a recovery play, I was right

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Reach4Entertainment (LSE:R4E) was a disastrous tip by me during my 12 years at t1ps.com – I first recommended it at 81p. Back on September 21st those now running t1ps advised their readers to sell at 3.5p, not having bothered to speak to the company first. I did and called it as a recovery buy. I hope folks followed my advice and averaged down as the shares are now 7.5p following two pieces of news today. Are they still cheap? I think so and here is why.

© Tom Winnifrith

If you did sell at 3.5p ( some folks realised 3p or less) following advice from others I am sorry. The lack of a company phone call was poor research and you know who to blame. And it is not me.

To read my most recent piece on the company click HERE

Anyhow enough of the past. Back to today’s news. First up is news that the company has reached agreement with its bank ( AIB) which secures its £14.8 million revolving credit facility. This means that as long as it trades in line with certain covenants it has secured lending until May 2015. By that time it should have cleared a good chunk of its debt and should easily be able to refinance the rest.

Secondly it has agreed to settle a deferred consideration due to Drew Hodges, the vendor of its US operation Spot & Co. It had been due to pay him $4.2 million this year but will now pay him $200,000 up front followed by $3 million in 12 quarterly instalments starting on 1st January 2013. The remaining $1 million can then be settled in shares at the then prevailing mid market price. The payments may be increased if Spot & Co beats certain performance targets. We will all be happy if that happens.

So where does that leave Reach4Entertainment? Having chatted at length to the company, I forecast a calendar 2012 EBITDA of £1.5 million with interest costs of £650,000). In 2013 I would be looking for £3-4 million. This is nothing like the level former CEO Jeremy Barbera used to promise but it is still a decent enough showing. And at that stage Reach can start to pay down its debt.

What is the stock worth on that basis? It is hard to say as there are no comparator stocks but on an EV/EBITDA multiple of 8 times bottom of the range 2013 forecasts we get a valuation of £24 million. Knock off the debt ( I assume some paydown in 2013) and you arrive at a value of £12 million or 16.2p a share. You should also knock off the SpotCo defcon and that reduces the number to 14.7p per share.

Reach4Entertainment has now been de-risked. There is still enough upside to justify a buy stance. I hope you averaged down before. It is still not too late to do so and reclaim some of your losses on the original tip. Buy.

Libertarian investment writer Tom Winnifrith writes extensively for a number of US and UK financial websites. All of that free material appears on his own blog, which also carries his extensive original non financial material, at TomWinnifrith.com – for alerts on all Tom’s writings follow him on twitter at @tomwinnifrith

Tom’s premium share website The Nifty Fifty was launched on October 28th 2012. Having created and run the t1ps website for 12 year his average gain per tip there was 42.7% (over 241 tips) with an average holding period of 36 months. His new website promises more of the same – for immediate access with another new tip due within 48 hours  – click here

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Comments

  1. laviniamalabe says:

    Tom

    You tipped this at 81p and have been telling holders to average down regularly all the way down to 3.5p , anyone who has taken your advice would almost certainly be bankrupt and have no cash left to buy at 3.5p , and yes they do know who to blame , it IS you .

  2. laviniamalabe says:

    PS.

    Have you sold any of the shares that you took in the 20p placing ?

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