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Importantly, they also expect the gross margin to improve by six percentage points to 43.4 per cent, reflecting several factors, including an unwinding of input costs procured at previously high prices, and the pass-through of inflationary price hikes to customers. On this basis, Venture could deliver second-half cash profit of £7.2mn, up 50 per cent on the first half, and second-half FCF of £4.2mn. It would slash net debt (ex-finance leases) from £15.5mn to £11.7mn, reducing leverage to one times the annual cash profit forecast.
Furthermore, analysts believe 2023 FCF of £6.8mn (5.4p) could rise to £8mn (6.3p) in 2024 to halve net debt to £5.3mn. The implication being a material transfer of the economic interest in the £39.2mn market capitalisation company from debt holders to shareholders. Indeed, the £10mn (8p a share) forecast deleveraging of the balance sheet equates to a quarter of Venture’s market capitalisation of £39mn.
Modestly rated
So, even if you only value the group on a modest multiple of five times cash profit to enterprise valuation, the de-gearing process combined with the forecast 14 per cent increase in cash profit to £13.2mn in 2024 supports a 50 per cent re-rating of the shares by the end of next year. The 20 per cent share price reversal since the 2022 annual results (‘A self-care specialist with a lot of potential’, 3 April 2023) is a buying opportunity.
Covered by Simon T in Investors Chronicle
Investors are too cautious with this cash-generative company
Improvements in cash flow and a better balance sheet could lead to a 50 per cent re-rating next year
First-half revenue rises 24 per cent to £23.5mn
Underlying cash profit up a third to £4.4mn
Free cash flow (FCF) of £2.6mn
Net leverage cut from 1.65 to 1.47 times cash profit
Order book 35 per cent higher than the start of the year
Investors continue to show a high degree of caution in their valuation of Aim-traded Venture Life (VLG:30.5p), a developer, manufacturer and distributor of products for the self-care market. It’s unwarranted.
Strip out the £2.3mn maiden revenue contribution from the three HL Healthcare ear, nose and throat brands (Earol, EarolSwim and Sterinase) acquired in December 2022, and Venture’s own brands delivered single-digit underlying revenue growth. The performance was buoyed by 21 per cent higher combined revenue of £5.2mn from two of the three BBI Healthcare brands acquired in 2021: Balance Activ, the leading UK brand for the treatment of bacterial vaginosis; and Lift, a range of glucose gels, shots and chewable tablets. Moreover, sales of the Gelclair brand more than trebled to £1mn. The muco-adhesive oral rinse gel used for painful symptoms of oral mucositis (a side-effect of some cancer therapies) was acquired as part of the complementary acquisition of oncology support product company Helsinn in 2021.
True, the Dentyl mouthwash brand continues to underperform, so much so that Venture has reduced the carrying value of the asset from £4.3mn to £3.8mn. Dentyl’s domestic sales have been hit by aggressive promotional activity by larger rival Listerine, while overseas distribution partner Samarkand failed to record any sales in China. That contract is under review. However, the underperformance of Dentyl and a few other owned brands should not take the shine off a likely strong second-half performance, which is underpinned by a 35 per cent higher order book than at the start of the year, and double-digit sales growth in customer brands. I also feel that investors are overlooking the significant deleveraging of the group’s balance sheet.
Venture’s free cash flow generation underrated
In the first half, Venture delivered free cash flow (FCF) of £2.6mn from £4.8mn underlying cash flow from operations. The business has a seasonal second-half weighting, so, factoring in the strong order book, analysts at house broker Cavendish expect the group to deliver 16 per cent higher revenue of £27.3mn.
Importantly, they also expect the gross margin to improve by six percentage points to 43.4 per cent, reflecting several factors, including an unwinding of input costs procured at previously high prices, and the pass-through of inflationary price hikes to customers. On this basis, Venture could deliver second-half cash profit of £7.2mn, up 50 per cent on the first half, and second-half FCF of £4.
More damage to credibility…
Time for a change
Looks like x2 things here.
Write down on mouthwash, revenue declines and impairments. This is impacting operating profit and increasing reliance on new brands.
Then the financing costs have shot up which they are focussing on. Borrowing rates seem high.
However if they can achieve top line growth in 2024 and maintain margins, pay down more debt then starts to look in a better place?
It's a complex set of numbers to be honest....and yes it looks like numbers from Cenkos (now Cavendish) have been cut materially...
The definition of income / adjusted income has always been odd for VL...Singer vs. Cenkos always had different numbers and it looks like Cavendish are using another set now. Don't quite get it. Did anyone go to the presentation?
Disappointing to see cavendish have massively cut back on EPS forecast. VLG have snuck in a heavy profit warning. What was that malarkey about meeting ‘management expectations’. Naughty
Yep, strong results. Once the finance costs fall away, this is rated very very lowly. Will be interested to see if there are any more forward EPS broker upgrades. Easy hold here. GLA
Rock solid performance, and set to get better.
Got a few of these today gl al!
I used today’s dip to 3x my holding.
This is a very well run company with its own range of great products, plus an extensive library of ingredients, plus an excellent distribution network, plus ample room for expansion at low cost.
And a great buy in price. What’s to not like?
Https://www.investorschronicle.co.uk/tips-ideas/2002/01/02/latest-update-companies-smashing-broker-forecasts/
VLG among those forecast by IC to grow earnings.
Aggregate Broker forecast EPS next 12 months has grown from 5.3p -> 6.7p up 23%) from 3 months ago to today.
6.7p EPS on a 32p buy puts VLG on a PE of 4.77
I’ve spent the day with Jerry Randall and Gianluca Braguti at the Milan factory. Gianluca has had the place for decades and when I was there, they ran one small and one large production lines. They estimated they had room in the existing buildings for another two production lines. Even after that, they have room at the factory to put up new buildings.
The staff are immensely loyal and the average length of service was about 12-13 years. The warehouse area, the logistics, the QC was all spot on and they have a catalogue of active ingredients running into the thousands.
It’s a great facility and the whole business is very well run. I got out with a very healthy profit, as a few of us bought out an elderly UK founder at a great price. I was a bit concerned about how orders weren’t really picking up as expected, from China, but I can’t ignore VLG with its recent expansion. I reckon we should 2x+ by the time we get a trading statement around Xmas,
Just my opinion.
>> Orders for 2024/2025.
Because it was a relative comparison and assuming in 2022 people were placing orders for 2024 then the point of 30% growth still stands. But I don't believe retailers are placing orders 9-18 months ahead. These are healthcare FMCG items not aircraft. 6 months is a reasonable number in that market. A family member worked for P&G and still works in FMCG so I am basing that on facts I know. Also we do know from past VLG updates, customers have been *committing* to orders for months ahead due to supply chain disruption and ensure supply of stocks. VLG are very circumspect of the order book due to commercial confidentiality but I disagree with the concern that growth in the order book isn't a reasonable predictor of booked sales. The key word is "committing". What's changed?
>> "the tone from management is overly cautious"
Having managed through a difficult period of years and a previous Chinese distribution partner disaster, I am not surprised! Overly cautious suggests scope for potential upside to me.
For the record here's more from Cenkos's new note, which forecasts 5.81p adjusted EPS this year, rising to 6.97p EPS next year.
They summarise:
Extracts:
"Venture Life Group Plc
De-levering on strong cash flows
Venture Life has provided a trading update for the six months to June 2023 expecting revenues of £23.5m for the period, up 24.4% YoY, supported by both Venture Life Brands (+27%) and Customer Brands (+20%). Revenue growth excluding the recently acquired HL Healthcare (HLH) was 11.4%. The company notes strong cash generation from operating activities of £4.6m, up 158% YoY and group leverage reduced to 1.4x from 1.6x at Dec-22. The board remains ‘cautiously optimistic’ of achieving FY23E market expectations and we maintain our Buy recommendation."
"Investment thesis – Venture Life continues to develop its buy and build strategy, with the recent acquisitions expanding the portfolio of brands, de-risking individual products and leveraging the sales and distribution infrastructure. With available manufacturing capacity and a strong balance sheet, we believe the company is well positioned to develop its strategy further. We maintain our Buy recommendation."
Jatw - what they say about the order book doesn’t appear to me to be weighted too far into the future. You might be right of course but my interpretation of this statement is that they are not talking about 2025 in the context of H2 results.
“ Order book increase of c.30% since end of the previous year, providing strong visibility over second half revenue and in line with management expectations.”
Agricore - your numbers may turn out to be correct….
But the tone from management is overly cautious….maybe the order book is 30% higher but that might because customers are placing orders for delivery in 2024/25 that they can still amend. Mgmt did not say the orders for delivery in H2 are up 30%.
if they raised forecasts that would signal much more than the mealy mouthed cautiously optimistic that they will be in line with expectations….that would also expose themselves career wise….
If you are right there will be a big beat on the FY results and the in-house brokers should be forecasting that after the HY results.
Just a quick add - because of supply chain disruption over the past few years an "order book" doesn't equate to speculative or "it might happen". Customers are forward planning and committing to orders months and months ahead (to ensure they get the stock, and don't suffer stock outs as they did during the supply chain crisis.
So we can take that 30% growth as pretty much nailed on sales numbers - by the nature and history of this business area.
Superb analysis here Agricore...very very good.
I honestly cannot believe where the SP is here....topped up significantly last week believing it is a complete gift at these levels. such a great long term story here...almost hope it will stay low to allow us all to take advantage of it for the next 6 months.
very much appreciated those back of hand calculations you've done below - as you say, the key here is this ballooning of the order book.
Dusting off my forecast 2023 numbers (this thread below) how did I do? Well, the forecast appears to be for a Y/E of 1X not 0.7X, so was I too optimistic?
I don't think so. Couple of reasons. First of all Cenkos' own numbers suggest a sub 1X group leverage, more like 0.9X. The key phrase I'm seeing however isthat the order book is ***30% ahead of the prior year end***. Well if we do a little maths and say £23.5m revenue H1 and using the 45%/55% usual sales ratio we arrive at £28.7m for H2 and a full year sales of £52.2m - about £1.5m ahead of Cenkos. But if we consider that the order books is 30% ahead, as stated, then calculating a steady run rate just isn't appropriate! If we consider the 30% on top of the H1 revenue of £23.5 (i.e. that the Y/E order book was for orders for the coming 6 months which seems reasonable) then we arrive at £30.5m so a £54m out turn for 2023 revenue.
Under that scenario adjusted proft therefore would be £12.5m+ and net debt around £9m therefore I believe I remain broadly on track with my 0.7X prediction (i.e. 9/12.5 is 0.717x)
I believe the broker has extrapolated past organic growth to arrive at lower numbers. But I think doing so and assuming steady state organic growth ignores a couple of key points:
1/ China/Samarkand is pumping stimulus so we will see strong growth in that area. Every time I watch coverage of China they are all still wearing masks. Won't Dentyl be a sales winner in a "covid" environment?
2/ Ecommerce is showing strong growth (far faster than historic) and there's plenty of runway there for a D2C model.
3/ Opportunities to grow Earol again was not historically there. I know first hand the complete lack of help from the NHS around this area (historically they did help people). So self help is the only solution, which is bad for taxpayers expecting free at the point of need, but good for VLG and its shareholders. I also know this is the same in the ROI and in a growing numbers of countries.... hard pressed health systems are driving the demand for self care products which is a collosal tailwind for VLG.
4/ An order book 30% ahead. So we already know there's more than steady state growth!!!!!
5/ And it's not just about revenue growth. There's capacity in both Sweden and Italy to grow, and this occurs this will improve margins (fixed costs are spread wider)
If I'm right that translates to a adj PE of 4.8x so on a conservative 10X that's 72p and extrapolating "only" 10% growth on a forward 2024 PE the adj PE drops to around 4.4x and a target price of 79p. But I would stress VLG's peers are valued 10X-20X so on a 2024 forward adj PE potentially VLG is worth 158p.
The market reaction of +0.75% to the share price (as I write) shows how overlooked this share is!
GLA
Not as positive as they might have us believe with the headline 24% revenue growth number. The proforma sales growth is 10% - does little more than match general inflation? Margins in what matters here are we have to wait until end September to see the cost side of the equation.
VLG will be squeezed hard by the likes of tesco, Superdrug, etc
Mgmt is only cautious in saying they are to meet expectations…..(the SP shows how low these expectations are), they need to beat expectations to get the rerating to 60p or more.
Good update and happy to add more on the opening.
Can't understand why some are selling after this update? Clearly share price is going to rise further, particularly when Simon Thompson at Investors Chronicle covers it.
Excellent update. Reassuring to hear all on course with expectations. Been scratching my head as to the extremely low rating for VLG (was worried there was something I was missing) but we should now see a good rerate to 50/60p this year. Happy camper
A solid H1 trading update, with revenues up 24% and the order books up 30% on the year end, providing strong visibility in meeting expectations.
Cenkos have retained their forecast of 5.81p EPS this year, i.e a P/E of only 5.7, and say Buy.
Plus there's strong cash generation this year, with "FY23E FCF expected to be £7.2m indicating a current FCF yield of 17%".
Plenty of early buy activity today…..ahead of a positive update?
Very interesting to watch this detailed presentation. Some impressive presentations from different key people within VLG and it was very useful to hear presentations on the different products and parts of the business.