The strangest penny share story you'll hear all year

published 5 January 2012

It may only be 5 January, but I doubt you'll hear a stranger story than this all year

To get to the start, we need to pop back to the tail end of last year, to 24 November. That was the day a new company called Worldlink Group (WGP) was admitted to the main list of the London Stock Exchange.

Now as you probably know, not just any old business can be accepted onto the main list. You've got to meet the entry requirements.

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While it's pretty straightforward for the racier outfits to get a listing on Aim or Plus Markets, companies on the main list are (rightly or wrongly) perceived as being safer. The London Stock Exchange insists that these companies are thoroughly vetted before being allowed in.

Now, on 24 November in a statement that was no doubt scrutinised, checked, debated and finally agreed by bankers, lawyers, PR advisers and the great London Stock Exchange itself, this statement was made about Worldlink:

"The market capitalisation at listing is anticipated to be circa £55m and the opening share price approximately £2.50."

To Worldlink's advisers, £2.50 must have seemed like a nice beefy share price, the sort to convince investors that this is a business with substance. And what about the £55m stock market value? It's not huge by any means but surely not a business that is going to disappear in a puff of dust.

But that was six weeks ago; it's a different picture now. Things have got better for Worldlink in terms of business: it's won some €15m of financial backing and launched two new promising initiatives, of which more in a moment.

So where is the share price now? It's at 15 pence! Worldlink is no longer valued at the £55m its bankers anticipated. Now, it's just £3.51m well below even the €15m value of the promised financing!

What on earth is going on?

In fact, Worldlink never achieved the £2.50 share price the admission announcement mentioned. The shares did open at 112.5p on the first day of trading, but by the end of the second day, and after the rather puny amount of 115,000 shares had been traded, the price had sunk to 25p. That's a staggering 77% slump from the opening price!

I have never seen anything like this in my life. And, to be honest, the silence from the London Stock Exchange, which you would think would want to explain this strange affair, is deafening.

To make the story even stranger, chief executive and major shareholder Neil Riches, whom I met just before Christmas, thinks that Worldlink is going to make serious money this year. And a report by Marble Arch Research calculates that Worldlink has a hidden value of £180m worth about £8 per share.

But here we are today, with Worldlink shares trading at 15p and right down in penny share territory. Intrigued? I certainly was! This is exactly the sort of anomaly I like to check out.

Let me deal first with how Worldlink might make money this year. We find a clue in a deal that it has struck with the mighty Ramsgate Football Club (of Ryman League Division 1). In a deal similar to those done by football clubs with credit card providers, Ramsgate will pocket 20% of any betting profits sourced from those who sign up to use a betting service Ramsgate football supporters presumably.

Where does Worldlink come into this? Well, it provides the online platform that makes this betting possible. And Riches sees the chance to roll the service out to other clubs. That makes sense why wouldn't these clubs go for it, given that it costs nothing and provides some much needed extra revenue? That means that this could soon be making money for Worldlink.

Why this battered stock could have huge hidden value

But that's not the end of the story. While providing the software platform for sports betting could be lucrative, it is not the reason for that £180m of hidden value Marble Arch Research talks about. This is where it really gets interesting!

In the 1990s Worldlink developed software that allowed for the dissemination of real-time data to mobile telephones. What made this special was that, rather than refreshing whole pages, Worldlink made it possible to transmit only the particular data item a rising share price, for example that had changed. Nothing very special about that any more, you may say. Active traders receive this sort of data feed all the time.

And that is exactly the point. Because Worldlink thinks that many of these service providers are infringing its software patents. For years it has been unable to pursue the transgressors. Now, though, it is ready to do so.

Years ago, both Reuters and WeComm bought licences from Worldlink, establishing the principle that it owns the rights. And lawyers on both sides of the Atlantic, who might be prepared to pursue the case in exchange for a share of the proceeds of success, have given Worldlink hope that its legal action can succeed.

A key test will be a 'Markman hearing' expected in late 2012 or early 2013. In this pre-trial procedure a US judge will express a view about Worldlink's patent infringement case. Encouragement from this quarter could lead to out of court settlements.

It is the view of Marble Arch Research that such settlements could be worth a lot of money. On the basis that Worldlink will be able to charge royalties, and discounting these at a rate of 40% per annum, Marble Arch comes up with its £180m figure.

This is a very strange story. With all that apparent potential value, I'll keep it on my radar, that's for sure!

Why you need to look carefully before you invest

But one thing this story does show is that you can't just assume that everything's OK, just because a stock is listed on the Main List of the stock exchange.

I spend my life defending my rationale for investing in interesting, innovative, exciting and potentially rewarding small companies that trade on the junior Aim market. Yes I know these small stocks by their nature can be risky but for me the upside potential can make those risks worthwhile.

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Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.