Penny Sleuth’s Tom Bulford thinks he has found a penny share with a huge profit potential for investors. Nexus Management (LON: NXS) offers IT support, but looking to dramatically expand its operations through the US. The company is franchising out its on-site support and installation operations. Tom says its close relationship with a major online electronics retailer in the U.S. makes Nexus well-placed for rapid growth, which would send the stock a long way skyward.

On 29 July I wrote about a company called Nexus Management (LON: NXS) which has an ambitious strategy and an interesting relationship with a large on-line retailer of electrical goods in the USA. At the time I expressed concern both about the retail climate in the USA and about a strange financial arrangement (more about that in a moment).

I was pleased yesterday to speak to Boris Adlam, the company’s US chairman. Adlam is an Oxford University graduate and former investment banker. He’s fluent in five languages and was once principal cellist of the National Youth Orchestra. It would be nice to be so talented, wouldn’t it?

Anyway, I was more interested in Boris’s ability to harmonise the constituent elements of Nexus and he was able to give me some very interesting background information. First of all, let me just remind you of Nexus’s business.

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In summary it offers IT back-up and support to small and large businesses and has data and call centres in Scotland and the USA. It has an investment in and a business relationship with PD Financial, a Los Angeles-based retailer of electronic and other luxury goods.

Last month Nexus bought a New York-based business called Nerd Force. It intends to franchise this across the USA and overseas. Nerd Force offers men in yellow vans who come out to your home or office and install or fix your computer. Already each time PD Financial sells a computer it offers back-up support from Nexus. This has proved to be a good source of new work for Nexus. But it now it wants to offer another piece of the technology jig-saw. This is the initial installation. At present when PD sells a computer to somebody who needs help setting it up, PD finds a local specialist who will happily accept the $200 job. Nexus would like to capture this payment by offering the service through Nerd Force.As I pointed out to Adlam, from its base in New York, Nerd Force is hardly able to install new computers all over the USA. However, Nerd Force can now say this to somebody who is thinking of becoming a franchisee in a certain district: ‘Five hundred new computers were supplied by PD into this area in the last year. Had you been the franchisee you would have had the chance to install each one of them.’ So PD is a platform upon which Nerd Force can be launched and it has already signed three new franchisees in the USA.

Highly targeted marketing should aid growth

But given the deteriorating consumer climate in the USA, the biggest influence on Nexus’s share price in the remainder of this year will probably be the sales performance of PD. Here, Adlam is very confident. He described PD’s business model as ‘the best I have ever seen’. He drew attention to the significance of a new long-term deal, signed in June, with Alliance Data which will approve, process and fund credit card transactions. With this financial backing in place, PD has now re-launched its business, changing its trading name from Peach Direct to VENUE (www.venue.com), and it hopes to continue its growth based on very sophisticated credit scoring and targeted marketing.

In simple terms, what PD does is to find, through data mining, the ideal spot at which customers have both the inclination to buy a product and the means to pay for it. There is no point in trying to sell to those who probably have every gadget already or to those who are demonstrably careful in their spending habits. And it also makes little point to sell to those who might struggle to repay. PD finds the sweet spot and can predict the outcome of any targeted marketing campaign with remarkable accuracy.

This is one feature of PD. A second is that it is a ‘virtual’ retailer. It sells only branded goods, delivery is outsourced and, crucially, it does not bear any of the financial risk in the event of a customer defaulting on payments. Now with the backing of Alliance Data and with customers finding credit cut off from other channels Adlam believes that PD is well placed.

So, finally I asked him to explain the renegotiation of the $2m payment from PD’s owners to Nexus. This followed Nexus’s sale of 72% of its stake in PD back to the latter’s owners. This was originally scheduled for June before being delayed by two months, with a strange and rather unnerving rider that ‘in the event that PD is unable to pay…..a charge of $100,000 per month will be levied.’

A genuine penny share

It seems inconceivable that PD should want to pay such a hefty penalty for late settlement, but according to Adlam such is the payback from PD’s targeted marketing campaigns that it could make sense for it to keep the cash in its own business. Since he is on the board of both companies Adlam is in a good position to know. But still I think that Nexus’s outside shareholders would be happy to see the money finally in its own coffers.

At today’s share price of 0.86p Nexus is valued at just £7.4m and so this is a genuine penny share. The strategy is clever and by offering computer users, both in the small business arena and at home, an installation service, remote back-up and on-site visits from the man in the yellow van it has a comprehensive support offering that it believes is unique.

If Nexus can pull it off – and the expansion of a franchise chain while running a transatlantic business is certainly a challenge – then the share price will go far. This is certainly one that I am monitoring.

Source: More News From Nerdland