The first year is the worst

It can be tempting to buy shares in small-cap companies when they float on the stock market. But the first year is nearly always tough going, says Tom Bulford. Here, he looks at one firm that went public, only to walk straight into a nightmare.

When I got married my mother gave me this bit of reassuring advice: “The first year is the worst”. At the time, it wasn’t the advice I wanted to hear. But it’s stuck with me. And I was reminded of it again this week when I was listening to the founder of a company that’s had a real rough time of it.

The company is called Ceres Media (CMI). It took the plunge and went public last year – only to walk straight into a nightmare.

When I met Alex Dowdeswell, founder and chief executive of Ceres, he seemed bemused by the whole thing. He did not understand why, in little more than a year since Ceres came onto AIM, its share price has fallen from 18p to 1p. The sale of just a handful of shares has knocked £5m off the value of the business. And yet Dowdeswell told me he has “never felt more confident” in Ceres.

I featured Ceres in Penny Sleuth last year and I said it was one to watch. To be honest, I would not be prepared to tip a company that had little if any revenue but a valuation of £6m. I know what happens to companies that fail to hit the ground running when they debut on the stock market, and I know that the life of a small company is hard – especially when its customers are a lot bigger than it is.

Why the share price plummeted

I like Dowdeswell – he is bright and straight talking. As a trained accountant, he understands the numbers – and he has the drive and perseverance to succeed. What he did not know a year ago, but has painfully learned since, is that while City advisers are happy to encourage companies on to the stock market with promises of keen investor interest and the prospect of a rising share price, they don’t mention the downside.

Within three months of coming on to the market, Ceres admitted that sales were not as buoyant as hoped, the finance director resigned, the City threw up its collective hands in horror and the share price went into free fall.

Ceres has run into problems typical of small companies. But let me first remind you what it actually does.


Ceres must compete on more than price

The opportunity that Dowdeswell has spotted is to replace advertisement banners and posters made from oil-based plastic with a biodegradable alternative. The product is not limited to these uses. For the Olympic Games, Ceres developed a compostable natural netting that was made by an Indian manufacturer from jute.

Ceres has two big challenges, and these are lessons for any penny share investor. The first is that the product does not have an obvious price advantage over the incumbent. The type of advertising banners that are seen in supermarket car parks or shop windows are made of polyethylene. This can be imported at low cost from China and it does what is required – so why change it?

Ceres’ compostable bio-plastics appease the green conscience but they do not offer customers a cheaper alternative.

To make inroads into the market Ceres has got to compete on something other than price and here bio-plastic has two advantages.

First, it is better for the environment – rather than being dumped in landfill where it will remain for decades, it can be passed through a composter and turned into fertiliser. This may be of no consequence to some, but plenty of organisations are keen to advertise their respect for the environment and should favour biodegradable products.

The other advantage of Ceres’ biodegradable film is that it has slightly different properties to normal plastic. In settings such as back-lit advertising billboards this can deliver a sharper image – as is being demonstrated around London today.

But Ceres Media also faces another significant problem.

Having to convince an entire supply chain

Apart from the relative merits of the product, Ceres has to try and persuade companies that are much bigger than it is, and have established supply chains, to change their ways. Simply getting hold of the decision maker in a large organisation can take months of trying. And in the case of the supermarket hoardings, the material from which these are made is not really the decision of the supermarket itself but of its suppliers – the printer of the banners and of the distributor who sells plastic film to the printers.

Ceres has to convince not just a single customer, but a whole supply chain that sees little reason to change its established ways.

Dowdeswell admits that it has been a struggle, especially here in the UK. But he has certainly not given up hope. “This is a huge market”, he told me. “If we could just get 1% of it we would do very well.”

Ceres may yet succeed – and I hope it does. But the stock market is quick to chide and slow to bless. The share price may take a lot longer to move from 1p to 18p than it took to complete the opposite journey.

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