M&A closes gap between fundamental value and what "Mr Market" currently discounts
Elderstreet stake acquired 02 GENERAL NEWS Globalworth premium In this issue Venture capital firm Draper Esprit has taken a 30.8% stake in venture capital trust manager Elderstreet. Both investment managers focus on the technology sector and they will be able to co-invest. Elderstreet has investments in a number of AIM-quoted companies through its VCTs. The purchase was funded by an issue of Draper Esprit shares worth just over £250,000. Simon Cook, the chief executive of Draper Esprit, is a former partner at Elderstreet so he knows the business and the people who run it, although he did leave more than 14 years ago. Cook has previously acquired portfolios from 3i and Cazenove, two other firms where he has worked. Draper Esprit has an option to acquire the remaining shares in Elderstreet, which has more than £25m under management. Adding Elderstreet to the group enables Draper Esprit to offer investors a range of EIS funds, VCTs and an ISA qualifying listed evergreen patient capital fund. The enlarged group has venture capital assets under management of more than £350m. At the end of September 2016, Draper Esprit had a net asset value of 352p a share, which is similar to the current share price. The June 2016 flotation price was 300p a share. Draper Esprit is quoted on Ireland’s Enterprise Securities Market as well as AIM.
Companies: HAYD CHT ABDP TRCS SXX
Pension deficits to start shrinking if discount rates mark-to-market
We are withdrawing all forecasts for Constellation Healthcare with immediate effect.
Companies: Constellation Healthcare Tech
Following on from our last quarterly we have delved further into the potential and challenges that the Internet of Things present the sector. Having spoken to a wide variety of companies from the sector (large and small, UK and overseas) it is apparent that there is going to be a very significant increase in the amount of data either generated by or available to Support Service companies. The key to generating value from this change will be breaking down the silos in which data is currently held, attracting and investing in the right skills and talent, seeing beyond the short-term investment that is likely to be needed and engaging with clients on a higher, more strategic level. If the sector doesn’t react, then the door is wide open for the Technology sector.
Companies: FOUR DSCV CLL CMS CNCT CHT FCRM LOK PPH STAF UTW
Constellation Healthcare* (CHT): Building the growth platform (CORP) | Sound Energy (SOU): Revised terms for Sidi Moktar acquisition (BUY)
Companies: Constellation Healthcare Tech Sound Energy Plc
Constellation has agreed to acquire Vega Medical Professionals (a provider of US medical billing services) for a maximum $24m (78/22 cash and shares at 140p). Vega’s EBITDA margins are currently only 5% due to its high US cost base and relative inefficiency. Significant cost savings will be realised and we have upgraded our FY 2017E EPS by 8% and 2018 by 14%. The maximum consideration represents 3x FY 2018E EBITDA, emphasising the value Constellation creates by adding doctors to its platform by acquisition. With the recent H1 results evidencing the success of the strategy with strong organic growth, rising margins and growing cash flow, we reiterate our 310p price target.
H1 results evidence the model and strategy are generating significant value, with organic sales growth in the core Medical Billing business of 22%, EBITDA margins rising from 29.9% in H1 2015 to 37.0% and free cash flow improving from a $4m outflow to an $11m inflow. We have upgraded our 2016E and 2017E EPS by 2% and – with net cash of $9m and continued strong prospects – we reiterate our target price of 310p (118% upside).
Berkeley Energia (BKY): Initiation of coverage: Clean fuel for Europe and beyond (BUY) | Constellation Healthcare* (CHT): Strong trading confirmed (CORP) | 7digital* (7DIG): H1 trading update highlights momentum (CORP) | Tristel* (TSTL): Trading update, acquisition and special dividend – new forecasts (CORP)
Companies: BKY CHT 7DIG TSTL
Constellation Healthcare* (CHT): Debt-free, cash-generative, focused on a growing and defensive US market (CORP) | Revolution Bars (RBG): Pre-close sales update (BUY) | Firestone Diamonds (FDI): Construction update (BUY) | Cambridge Cognition* (COG): Largest contract win to date for Academic Research (CORP) | Gooch & Housego^ (GHH): Sensible bolt-on acquisitions (HOLD)
Companies: CHT RBG FDI COG GHH
A significant proportion of the Support Services industry is characterised by regular, scheduled visits driven by fear that something might be about to go wrong. Maintenance schedules by Facilities Managers or visits by Home Carers for example. An entire cost base dedicated to continuously rotating skills around a client base (preventative) sits alongside another cost base focused on fixing a problem when the safety net fails (reactive). But what if you could tell that a part is about to fail or a particular service is about to be needed (predictive)? The Internet of Things holds enormous potential for the Support Services sector. Those fleets of white vans that currently monotonously tour clients will only be seen when they are on-route to a specific need, laden with precisely the right part.
Companies: FOUR DSCV CMS CNCT CHT LOK PPH STAF UTW
This quarter’s topic: Is the model good enough? Growth in the current low-growth environment is hard fought but the Support Services sector contains a range of innovative business models that are enabling strong progress against a continued difficult backdrop. Having looked at the level of value-add (and ability to raise margins) in the last quarterly, we now look at EPS forecast trends. Innovative models that separate a company from the competition, support market share gains and drive growth are evidenced by forecast upgrades that are likely to repeat as the model continues to deliver.
Companies: FOUR DSCV CMS CONN CHT LOK PNA PPH STAF
Constellation Healthcare*: Building out the platform (CORP) | Artilium*: Acquires customer contact specialist (CORP) | Somero Enterprise*: Analyst interview (CORP) | Frontier Developments*: Interims (CORP) | Renold: Disappointing trading update (U/R)
Companies: CHT ARTA SOM FDEV RNO WAND
Constellation Healthcare*: 62% EBITDA growth (CORP) | PPHE*: Continued strong performance and potential (CORP) | Petra Diamonds: Trading update (BUY) | Aureus Mining: Operational update (U/R) | BATM*: BATM goes Green (CORP)
Companies: CHT PPH PDL AUE BVC
Constellation Healthcare*: Accelerating the growth strategy (CORP) | Gresham House Strategic*: Interim results (CORP)
Companies: Constellation Healthcare Tech Gresham House Strategic
Research Tree provides access to ongoing research coverage, media content and regulatory news on Constellation Healthcare Tech.
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Alliance Pharma’s H1 interims are relatively robust, with trading conforming to recent commentary. Whilst there has been an impact in some areas of the business in H1 (Prescription Medicine) as expected per the trading update in July, the rest of the business particularly Kelo-cote, has proved very resilient and highlights the defensive nature of the business, and underlying adj. PBT (excl. amortisation and impairment charges) was solid in H1 2020 at £16.3m (+7% YoY). We anticipate some push and pulls in H2 2020 but net we anticipate a better performance as demand recovers, and the Board have reiterated that full year results are expected to be in line with market expectations. The reinstatement of an interim dividend of 0.536p signals confidence in this. We have used today’s announcement to reinstate our forecasts, which are broadly in line with guidance and consensus. Our new FY’20 forecasts are c.10% below our previous estimates prior to the Covid-19 pandemic with YoY revenue and adj. EBITDA growth rates of -6.5% and -10.1%. We forecast a return to growth in FY’21 and have used the opportunity to introduce our FY’22 numbers looking for ‘see-through’ revenue of £153.2m and adj. EBITDA of £41.5m. Our main ongoing concern is that growth is highly dependent on Kelo-cote, a situation that has been augmented during the Covid-19 pandemic, and the Group needs to turn once again to deal-making to supplement organic growth to grow the portfolio. On our revised estimates, our new DCF/Peer group multiple derived target price is 91p/share and we move from Hold to Buy.
Companies: Alliance Pharma Plc
Futura Medical’s H120 results confirm progress is maintained as expected. The key developments with MED3000, its novel treatment for erectile dysfunction (ED), suggest that European OTC approval is likely during 2021 and in the US, pending a small six-month trial to show longer term efficacy, is expected in 2022. The format of this supplementary trial will be discussed at the next FDA meeting, expected before end-October. Current funds of £2.62m (at end-June 2020) provide a cash runway to Q221, although this does not include the costs of the US study. We value Futura Medical at £153.8m, equivalent to 60.9p a share.
Companies: Futura Medical Plc
IXICO has been selected as the image collection and analysis partner for the Bio-Hermes trial, co-ordinated by the Global Alzheimer's Platform Foundation (GAP). The trial, aiming to assess Alzheimer's Disease (AD) biomarkers, will see IXICO analyse the brain scans of 1,000 patients with early stage AD. While participation will deliver revenues to IXICO in subsequent years, we believe the enhanced profile amongst the trial participants and GAP industry partners will deliver significant ‘intangible' benefits to the company. We maintain our Buy recommendation.
Companies: IXICO Plc
Yourgene has announced it has appointed IBL-America as a non-exclusive distributor for its range of PCR-based reproductive health and oncology products, including the DPYD assay which tests whether cancer patients are at risk from the administration of a common chemotherapy agent. These will be initially sold into the Research Use Only market in the US. As such, initial revenues are likely to be modest, but will act as an important test bed for establishing potential demand in the clinical setting. If the reception is positive, products will be submitted for FDA registration, potentially unlocking a £30m addressable market opportunity. We make no change to our forecasts, but view this another positive step to generating meaningful revenues in the world’s largest market, which remains a largely greenfield opportunity for Yourgene.
Companies: Yourgene Health Plc
Yourgene continues to progress across all areas of the business, with core trading on track. Demand has been increasing for Yourgene’s Covid-19 testing services, and is expected to reach 10k/month from early October onwards. This would equate to a £3.0m boost to revenues in the year to Mar-21 and we upgrade forecasts accordingly, with outer year estimates unchanged for now. We view this as a base level of demand, with scope for further upgrades if demand continues to increase and/or lasts beyond March. Our underlying estimates for the core are unchanged.
Having navigated the challenge of running a clinical trial during a global pandemic, Destiny has blossomed in mid-2020. It is on track to announce topline Phase 2b results for XF-73 in the prevention of post-surgical infections in Q1 2021. It has also expanded its pipeline to span the two most contemporary issues in biotech – the microbiome and the prevention of COVID-19 infections. Destiny’s interim financials demonstrate its continued prudent financial management that underpins these achievements against the backdrop of Covid-19.
Companies: Destiny Pharma Plc
Allergy Therapeutics delivered a solid 6% revenue growth for FY20 to £78.2m, from £73.7m, despite COVID-19 impacts taking a 2% toll. The well-established European commercial platform produced operating profit before R&D of £14.2m, from £11.3m, with R&D spend of £9.0m, from £13.2m. Pollinex Quattro Grass is set to start a pilot Phase III study before initiating full registration trials. The promising VLP-based peanut vaccine reported highly encouraging preclinical data which, if maintained, could be transformational for future prospects. The fruits of the development portfolio are expected to enable the market entry into the commercially attractive US. Cash resources of £37.0m are ample to fund near-term requirements. We initiate coverage with a £325m (51p a share) valuation.
Companies: Allergy Therapeutics Plc
Whilst headline H1 revenue growth of 23% is eye-catching, for us the most comforting factor is the robust performance of the underlying business in the most challenging of circumstances. Sales of the Primestore MTM sample collection device contributed £6.5m, meaning the core business was -8% in the period, well ahead of internal expectations. Highlights include strong performances from BhB, DiaSpect Tm and the Clinical Chemistry portfolio, all of which grew revenues in the period. Whilst there were challenges in certain geographies, this is a very creditable performance and testament to the strength and defensiveness of the core business. We make no further change to our forecasts at this stage, having upgraded regularly in recent months. Given we have only included firm orders for Primestore up until the end of this month, we remain confident further upgrades are likely for the rest of this year and into next. In the meantime, latent growth potential in the core business is building with, inter alia, Chinese approval of Quo-Test, strong momentum with DiaSpect Tm, the Trellus health investment and a variety of contract manufacturing orders in the Central Lab/Life Sciences segment adding to the medium term growth outlook. Given the continuing scope for upgrades, we continue to see upside potential in the shares – EKF remains one of our Best Ideas for 2020 (up 66% YTD).
Companies: EKF Diagnostics Holdings Plc
Interim results to 30 June largely reflected the licensing income from ASK Pharm in China. Revenues were £8.9m, with royalties of c.£0.2m despite disruptions due to COVID-19 and £8.7m of milestone payments. This resulted in an adjusted net profit of £4.4m (vs a loss of £3.4m in H1 2019). A net cash inflow of £2.4m in the period resulted in cash at 30 June of £6.5m, providing a cash runway to Q1 2021. The figure excludes potential significant up-front payments and milestones for the US, for which a licensing deal is still expected. An order to its contract manufacturer for US launch stocks for delivery by year-end should provide comfort despite the understandable shortage of information pertaining to licensing discussions. We leave our forecasts unchanged (excludes potential upfront payments from US licensing deal) and reiterate our 350p target price.
Companies: Shield Therapeutics Plc
Interim results to 30 June 2020 showed a 38% increase in revenues, despite COVID-related disruption to clinical trials, illustrating the clear commercial focus that has been brought to bear on its range of digital technologies and solutions. Together with an 18% reduction in operating expenses, adjusted LBITDA and pre-tax loss improved by £1.3m to -£0.29m and -£0.36m, respectively. Period-end cash was £1.96m, with cash burn falling £1.1m to £0.2m in the period. Break-even in Q4 2020 is still anticipated. The contracted order book increased 35% to c.£10m at 31 August (vs. 30 June 2020), providing increased visibility of revenues in H2 and FY 2021 (c.108% and 57% of current forecasts, respectively). Due to the changing working patterns that are emerging as a result of the COVID pandemic, we believe that Cambridge Cognition is well positioned to be a long-term beneficiary of the trend of running virtual trials. We leave forecasts unchanged, but in light of the strong order book and potential for future upgrades, we raise target to 80p, which implies a 2021 EV/sales multiple of 3.4x.
Companies: Cambridge Cognition Holdings Plc
Tiziana Life Sciences PLC (LON:TILS, NASDAQ:TLSA) has expanded the range of indications — which include severe inflammatory and autoimmune diseases — of its lead therapy fully human anti-CD3 monoclonal antibody Foralumab, signing a new collaboration in Brazil to develop the nasal formulation of For
Companies: Tiziana Life Sciences Plc
SDI reported full-year results to 30 April that were slightly ahead (+2%) of the trading update issued by the company on 23 April with net debt of £4.0m comparing favourably to our forecast of £4.3m. Underlying organic growth of 3.7% organic growth, despite the COVID-19 disruption in Q4, was supplemented by growth from acquisitions in FY 2019 and FY 2020. Adjusted pre-tax profit rose 44% to £4.3m with adjusted EPS up 21% to 3.4p. Net debt at 30 April was £4.0m. With evidence of trading activity normalising and the positive outlook statement, indicating adjusted pre-tax profit to be at least as good as FY 2019, we reinstate forecasts. We re-introduce a target price of 100p, which implies the stock trading on FY 2021 P/E of 27.5x falling to 24.6x in FY 2022 – in line with its peer group (e.g. Judges Scientific which trades on 33.8x, falling to 27.5x for slightly lower growth) and underpinned by a FY 2020 free cashflow yield of 3.2%.
Companies: SDI Group Plc
The COVID-19 pandemic has had a significant impact globally in many areas. While primarily a health issue, it has had wide-ranging implications for stock markets, which have now rallied after the plunge in share prices in mid-March when the full severity of the emerging pandemic became more widely appreciated. Nonetheless, the FTSE 100 Index remains almost 20% off its late February 2020 figure.
Companies: AVO ARBB ARIX CLIG DNL GDR ICGT NSF PCA PIN PXC PHP RECI STX SCE TRX SHED VTA YEW
Interim results to 30 June reflected the increase in R&D expenses commensurate with the continued enrolment into its Phase 2b study of XF-73. The statutory net loss was £2.4m (vs.£2.1m) with adjusted net loss also £2.4m (vs. £2.0m), driven by £2.3m (+35%) of R&D. Period-end cash was £5.6m (vs. £7.5m at 31 December 2019). Having agreed a protocol amendment with the FDA, which revised the XF-73 nasal study size to 125 patients without comprising the statistical quality, and having brought on stream more clinical centres to Europe, we are increasingly confident that the study will complete in Q4 2020, allowing for presentation of headline results in Q1 2021. The value of XF-73 at this point, given that Destiny should have a Phase III-ready asset with FDA Fast Track designation, is expected to rise substantially. XF-73 could potentially be the first approved antimicrobial for the prevention of S. aureus infections in high-risk surgery patients, for which there is a clear unmet medical need in an estimated $1bn+ addressable market. We leave forecasts unchanged and reiterate our 250p target price.
Shield Therapeutics’ (STX’s) interim results highlight the progress made year to date. Re-analysis of the Feraccru/Accrufer AEGIS-H2H data show it is a credible alternative to IV iron therapy for iron deficiency anaemia (IDA) in the long term. With the product out-licensed in China to partner ASK Pharm, all eyes remain on the announcement of a US commercial partner (expected this year). Royalties received from H120 sales of the product (UK and Germany) by partner Norgine are slowly building, but pricing and reimbursement discussions resuming in Europe could lead to ongoing rollouts in key countries (France, Spain and Italy) in 2021. STX’s cash runway extends into Q121, an upfront licensing payment from a US deal would ameliorate the need for further capital. We value Shield at £379.1m.