DQE – we are not amused

Continuing on our theme of Penny Dreadful Day, next up we have DQE (DQ Entertainment), which announced its prelims
(http://is.gd/ISt7g2) yesterday, sending its share price down 10.7% to 13.5p. Needless to say, I don’t actually have to look at the RNS to know that I aint gonna like it. But hey, today is Penny Dreadful Day, so let’s take a looksee anyway. Keen readers of my blog will already know that I have been bearish on DQE for some time. It’s convenient for me when I make correct calls, not just for the bragging rights, but it helps translate into actual profits, which is the name of the game. I still make horrendous errors of judgement (some of them look hopelessly naive in retrospect), of course, but the more I can improve my game, the more money I make, and the more losses I avoid.

DQE is “a leading global animation, gaming, live action, entertainment production and distribution company”. My understanding of what is does is to take old cartoons, mostly from Disney, and translate them into Indian. Or maybe it’s the other way around. Whatever. It’s something like that.

DQE seems to have sold itself on a growth story, and the growth has now faltered. Revenues are down on a sterling basis, although actually up a little in rupee terms. Operating profits are down in sterling terms, and I notice, significantly, I feel, that their order book is down materially. The directors report their revenue performance as “encouraging”, although I would describe it as “stalled”.

I notice that the number of shares in issue has climbed dramatically, and the company has a very low ROE. Interest cover is 3.16, which is of insufficient margin of safety. It gets worse. Net Cash Flow was negative, and there was hefty capex on top of that. DQE has a fair amount of net debt, so it’ll be interesting to see how what happens there. Will the company make cash calls, or will it just go down the toilet? I’m guessing that it’s the former that will happen, at least for the foreseeable future. It must be remembered that given its very low PER of 1.5, it is very expensive for the company to raise capital. The ROE that it does make is much lower than that implied cost of capital. Even if the company was sound operationally – which I doubt – it’s a shambles financially. I note that receivables are higher than revenues, which probably goes some way to explaining why the company’s cashflows are so poor.

This company has a lot of similarities to GNG: foreign company, listed on AIM, atrocious cashflow, receivables more than revenues, low ROE, poor market sentiment expressed as low PER in share price, stalled growth, no dividend, only a few listed on the stock market. Anything else? I’m sure I’ve forgotten plenty of things.

DQE also has a low z score and piotroski score (it’s 2).

Despite being on a PE of 1.5, I think this company is uninvestable.

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About mcturra2000

Computer programmer living in Scotland.
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