COS is a biomaterials company developing and manufacturing medical grade collagen components for use in medical devices, regenerative medicine, and in vitro diagnostic products. It aims to grow organically and through acquisition to take the business closer to the end-product margin. While the majority of sales are secure, visibility and timing of new business is less certain. Therefore, our forecasts are based on a more conservative approach for coming years. Recently added commercial and operational firepower provides greater support and reassurance that new opportunities will convert, allowing revised forecasts to be exceeded.
COS supplies value-added bio-functional collagen and provides R&D and contract manufacturing services to a broad range of international clients. Its growth strategy is to expand the client base organically and through acquisitions to take the company further up the value added chain.
For new opportunities, COS has limited control over the decisions, buying patterns and regulatory position of clients, making forecasting difficult. A more conservative view on conversion of new business over the next 3 years reduces forecasts markedly (24-52%), although EBITDA is less affected.
The cut in medium-term forecasts has a significant effect on our DCF valuation, as near-term changes have a disproportionate influence. Our NPV of the enterprise has fallen from £73m to £46m, or from 39p to 26p per share. 97% of this value is derived from the terminal value, given the short-term cash burn.
Recurring revenues are secure, but the exact timing of new development, manufacturing, and supply agreements is less certain. Changes to customer project timelines and regulatory delays remains a source of risk. Route to Chondromimetic commercialisation is currently in early stage planning.
Management is developing a value added company which will ultimately be reflected in the valuation. COS is reviewing new opportunities, which include a China JV and cartilage repair product Chondromimetic – however, the company remains sensitive to the short-term buying activities of its new customers.
