Small Talk: Can Pursuit Dynamics turn potential into profit?

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The Independent Online

Although this column has covered the polarisation of analysts' views on Pursuit Dynamics in the past, last Thursday's trading update contained enough new information to warrant a more detailed examination of the company.

To recap, Pursuit Dynamics is an Alternative Investment Market-listed developer of technology for use in a variety of industries, from fire extinguishing to bio-ethanol production to food and beverage production. Its patented PDX Reactor uses supersonic vapour flow and "condensation shockwave" through the injection of high velocity steam to mix, heat and agitate liquids.

Thursday's trading statement was typically bullish, waxing lyrical about its technology's potential revenue generation, with particular reference to its bio-ethanol yield enhancing qualities, a new venture.

The trouble is, the company has been beating the same drum since it was formed, and there is still hardly any sign of any of the revenues it talks about.

The very last sentence of the update contained a profit warning. It read: "We expect to see our food and brewing business continue to grow its revenues in 2008; however, the rate of growth may be slower than previously anticipated in the market."

It may not quite be as sexy as fire prevention or biofuel, but so far the only real revenue Pursuit has generated has been in the food and brewing sector.

Clearly, burying the bad news at the end of the statement worked – despite the warning, the shares actually closed Thursday's session higher. Despite the company's indifferent record on delivering on its promises, the market has seen fit to give it a valuation of £145m based on potential future earnings. Current year revenues will be around £3m, lower than forecast.

With £7.5m of cash in the bank the current burn rate of £500,000 a month will see them through until January 2009 at best. But is Pursuit worth £145m? It is always tough valuing technology, but the company looks as if it is being valued at levels not seen since the height of the dot.com boom.

Of three brokers following the stock, only Investec has anything bearish to say. And it is very bearish. It slashed its forecasts last week, and now gives the stock a price target of 61p, implying 75 per cent downside from the current price. Its analyst, Chris Dyett, wrote: "Today's statement also provides another example of Pursuit changing its highest priority application(s) – with Bio-ethanol taking the lead this time, whereas for a number of years Food and Brewing was the key ... Bio-ethanol was not mentioned as an opportunity until a year or so ago, and is talked about the same way by the company as oil, which is barely mentioned now. For us, the company's tendency to cycle through end market applications is worrying as the market's expectation is often not met by reality."

Both other brokers following the stock are much more bullish. House broker Cenkos Securities and Ambrian have "buy" recommendations on the stock, with the former setting a price target of 300p, telling clients that its belief in PDX's potential remains unshaken and that it expects positive newsflow soon.

However, anyone buying into the story at this price is taking a big gamble on the PDX Technology not only gaining widespread acceptance but also that the company can break even before it runs out of cash.

Pursuit declined to tell Small Talk when it expects to break even, and given Pursuit's record it is hard to imagine it will become cashflow positive before running out of money.

Clearly the company believes this is exciting proprietary technology, patent-protected and with a range of potentially lucrative applications – and with names like Blackrock, Odey Asset Management and M&G on the shareholder register it has some heavyweight City backers. But at this stage it looks as if Pursuit's management has got carried away with its potential and forgotten about making money, and its one current revenue stream isn't even functioning as planned.

Given the strong run the shares have had and the fact that Thursday's warning did not result in any sell-off, investors could take this as an opportunity to get out of jail free. If the technology does prove to have successful commercial applications there is undoubtedly long-term upside, but although this is rocket science, on the scale of risk Pursuit is out in the stratosphere.



Emergency handset maker SRT thrives

Software Radio Technology, the Aim-listed developer of digital communications, is to put its money where its mouth is by launching its first range of own-label Tetra handsets.

The company has been working on Tetra technology, which allows emergency services unbroken communication in the event of a disaster, for four to five years. The launch of its own label product should give the company far greater leverage in a potentially lucrative market.

Interim results are due on 1 November, but the word is that prior to that announcement the company could reveal the first significant order of the handsets. At this stage the customer is unknown, but it is thought to come from South Asia, where SRT has been developing its technology with local partners.

With little in the way of competition, SRT has been highlighted as a stock to watch in Small Talk before – but the latest development could see the shares break out of their trading range.

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