Member Info for golfnut59

Financial modelling is notoriously difficult but I have completed a DCF on a number of scenarios to determine what a fair value on the Alpha share price should be.

As we are all aware, the current high interest environment means ALPHA will make in excess of £70m in free cash flow this year. In all scenarios I have used a very conservative discount rate of 10% and terminal rate of 1%. Based on an initial FCF of £70m. Here are the results:

Growth rate (years 1-10) of 5%. Fair Value = £24.39

Growth rate (years 1-10) of 10%. Fair Value = £34.83

Growth rate (years 1-10) of 15%. Fair Value = £49.86

If you go ultra conservative by assuming an initial free cash flow of £50m to reflect the slim possibility of interest rates returning back to less than 1% in the next 12-18 months. Even then, if you use a modest growth rate of 10%, I'm still getting a fair value of £24.88 per share.

However you wish to dice it, using DCF, at £16.60, Alpha shares are very undervalued.

I have added to my position today

The science is very sound but the only thing left causing any anxiety is around the issue of funding. Don’t get me wrong, Avacta will get the funding, but the market is nervous about how this will look and at what cost.

It might be an unpopular opinion but I’d be quite happy if Avacta did an equity raise for £50-70m early in the new year. Despite the horrendous market conditions, I think a raise price of 130p-160p will be easily achievable once the P1a data is released.

Yes, this will cause some dilution which nobody wants, but 15-20% dilution here is not a great deal in the grand scheme of things, especially if this cash enables us to: complete the AVA6000 P2 trial and AVA3996 P1 trial without the need of a partner. Its my view that a little dilution upfront will be more advantageous to us shareholders in the long run, rather the dilution coming later down the line in the form of lower profits due to licencing larger parts of our lead two assets.

Graham and Paul at Stockopedia both very bearish on Boom.

Here is what Graham had to say today:

Audioboom is one of the worst offenders when it comes to emphasising adjusted EBITDA over real profits. Its H1 results (reviewed by Paul in July) showed adj. EBITDA of $300k, and then share-based payments (not included in adj. EBITDA) of $1.4 million! All told, the operating loss finished at $10.6m, including a provision for an onerous contract.

Here are the key points from today’s Q3 update to the end of September:

Total year-to-date revenue (nine months) down 20% to $45.8m, “reflecting the loss of the Morbid podcast which left the network in May 2022 and a weak advertising market during this period”.

“Strong start to Q4 2024 with anticipated revenue of at least US $19 million…”

And now for profitability:

“Total adjusted EBITDA loss for the nine months to 30 September 2023 of US $1.7 million, which includes full payment of all creator minimum guarantees signed to the Audioboom network before the advertising market downturn”

“Anticipated return to adjusted EBITDA profit in Q4 2023 through acceleration in revenue and consequently reduced exposure to creator contractual minimum guarantee obligations”

When there’s an adjusted EBITDA loss, I find it very hard not to take a negative stance - this is the company putting its best foot forward, even ignoring a large chunk of employee pay in the form of share options, and it’s still loss-making?

In fairness to Audioboom, the advertising market has been very rough. But then investors should ask themselves: why invest in a business that is so exposed to the winds of fortune?

Buying up content and monetising it with ads is no easy task - large media organisations can usually pull it off. But would I want to bet on a small media company being able to do it consistently? Not really, no.

When it comes to the podcasting niche in which Audioboom specialises, this is an unproven space when it comes to third parties investing in them and monetising them. I agree with Paul’s view that ads in podcasts are off-putting. I don’t think there is any easy solution to this.

Cash balance - the Audioboom cash balance drops to $3m (June 2023: $5.3m). This is one company I would certainly not want to own if its cash balance falls into the red.

CEO comment: he says “I am confident about our prospects for 2024 and I am pleased to maintain our expectations for record revenue performance next year."

Estimates: the RNS and the CEO comment do not spell out the fact that revenue and profit expectations for 2023 must be reduced. A note from Cavendish this morning helpfully does this job for us: revenue forecast down 7% to $65m, and the new adjusted EBITDA forecast for 2023 is a loss of $1.5m (previously a profit of $0.6m).

The estimates for 2024, apart from the company’s cash balance, are indeed unchanged.

Graham’s view

It’s easy for me to say

We either have a leak or we have an institutional sized buyer who has told their broker to buy as much stock as they can get their hands on whatever the cost.

@Moneysponge, the answer to your question is: YES

Nice article from The Lancet for those who wish to understand more about ADCs

https://www.thelancet.com/journals/eclinm/article/PIIS2589-5370(23)00290-0/fulltext

For those that haven’t read “for blood and money” and to add a bit more colour to @jive-turkey’s brilliant post. What’s arguably even more astonishing than the story of ibrutinib (acquired by AbbVie for $21B) is the story of Calquence, the BTK inhibitor purchased buy Astra Zeneca in 2015 for $6.4B.

Two employee’s who were instrumental in the development of ibrutinib were fired by the trigger-happy CEO at Pharmacyclics part way through the phase 1B/2 trial in 2012. Rather than feeling sorry for themselves, a few weeks later, with the help of a wealthy bio tech investor, they set up their own company - Acerta. Within a few months they had acquired their own BTK inhibitor from Merk for $1,000. Starting out in a make shift lab in the garage of one of the founders’ homes, they got to work on their newly acquired molecule. Working at breakneck speed, they had entered the clinic in a phase 1 trial by the end of 2013.

During the course of the phase 1 trial, they were granted FDA accelerated approval for mantel cell lymphoma which enabled them to significantly reduce the cost of development and time to market.

Owing to the exceptional trial data, in Q4 2015 Astra Zeneca had seen enough and agreed to buy the company for $7 billion (later reduced to $6.4B due to patent litigation) This was despite the fact that Calquence still had to undergo a phase 3 study.

Astra Zeneca’s bet paid off and the drug was approved by the FDA in Oct 2017 (a little under 4 years after entering the clinic) for use against mantel cell lymphoma. Calquence has gone on to be a blockbuster drug with sales of over £2B per annum and is taking significant market share from ibrutinib.

Not only is this a brilliant story but it is also very relevant to Avacta holders as the strategy and pathway to approval has many similarities to what we are witnessing with AVA6000. I would highly recommend you read the book.

This RNS took me by surprise although I really like the look of this new acquisition. Cobase looks like a fantastic little business that has built a really innovative software banking solution. The 50% client growth in the last 12 months suggests demand is certainly there for the product. With 100+ corporates using the Cobase banking software I would imagine Alphas slick sales team should be able to convert a big chunk of them into buying services from Alpha which will make the £8m (plus earn out) acquisition cost an absolute bargain.

If Morgan Tillbrook thinks buying Cobase is a good move then I suspect he will most likely be proved right like most of his decisions. Exciting times !

Check out the Cobase website. There is a lovely video explainer of their software solution https://www.cobase.com

@ShearClass I think its unlikely the market doesn't give ALPH any credit for the >£70m they will earn in interest in this year. Whilst its frustrating they don't declare this in the headline revenue number it will still there in black and white in the P & L under "other operating income". imo Institutions running the slide rule over ALPH are going to identify this and rightly conclude that interest earned is very much related to the principle activities of the company. Any fund manager or serious analyst is going to identify the discrepancy between the reporting of interest income Vs WISE and adjust accordingly. The appointment of a new broker will get more eyes on this share plus the move to the FTSE 250 next year will really help. The average PI may not notice this discrepancy, but the re-rating of this share is most likely to come from institutional buying. In the great scheme of things I'm pretty relaxed about it especially considering I'm in ALPH for investment purposes and not a quick flip.

20% growth is very good in current market conditions but as @ShearClass points out not enough to push the shares higher. The £33m in interest is slightly higher than I was expecting so a pleasant surprise there. Brokers target of £120m revenues (excluding interest income) looks like it will be achieved especially considering June was a record month for the company. My forecast of c £100m PAT looks very doable assuming rates don't come down much between now and year end. All in all I'm very pleased with the update. The value here is undeniable. Patience will pay off in spades.

100% agree with your reasoning there @ShearClass. Morgan Tillbrook is in my opinion the best CEO on the UK public markets so if anyone can lead ALPH into a £10bn market cap company then he can. As you say, its going to be quite a ride!

Some great posts from you @ShearClass. So in H1 they have earned £29.25m in interest income.

Compare this to 2022 where they earned £9m in interest income for the year.

Other than the significant amounts of cash earned from the interest income, as ShearClass points out, these figures show us that ALPH have added £300m in client balances in Q2. That is a 19% increase in growth in one quarter! Something tells me things are going rather well at ALPH.

Lets assume modest growth in the final two quarters of the year:

Q3 blended average balance £2Bn @ 4% = £20m

Q4 blended average balance £2.1Bn @ 4% = £21m

Based on these projections ALPH will earn £70.25m in interest income

Now lets look at the last broker note from Jan 23. They had the following: Revenues of £120m & income from client balances ("other operating income") £24m. Added together that gives us a total income of £144m. The forecast PBT from this was £71m. Excluding the £24m interest income we are left with £47m of PBT.

Its pretty clear to me that due to the 19% growth in Q2 vs Q1 that the brokers forecast of £47m PBT in earnings (not including interest from client funds) will likely prove way off the mark. If conservatively we say this figure is going to be £60m that means ALPH should earn c. £130m PBT in 2023 (60m + 70m from interest income)

Assuming ALPH pay the full corporation tax rate of 25%, that leaves a PAT of c. £100m. Current market cap of ALPH is £900m so that's a PE ratio of 9 which is ridiculously cheap for a company growing at an extraordinarily fast rate.

In this current market, range bound feels like a win. Alpha is now my biggest position by a distance. I will quite happily add more if it dips below £20. If the HY results are anywhere near as good as we all think they are going to be then the market is going to get a shock. The stock will look criminally cheap at current prices, even in these horrendous market conditions. For this reason I believe we will see decent re-rate at the back end of the summer.

Agreed @ ShearClass. The Capex you mention has to be taken into context with the speed in which TBLD are buying in and developing IP. One could argue the TBLD are trying to grow a little too quickly. I think a period of consolidation is needed especially as the macro backdrop looks very uncertain in the near future.

Despite this, which ever way yo dice it, from where I'm sitting at £100m market cap the shares are very attractively priced.

Seems likely although a member on here was in contact with TBLD recently (via email) and was told that none of the directors were selling. Either TBLD were unaware of this at the time or they were telling porkies.

Results today read well. This share is at bargain basement levels so I’m not surprised to see the shares are up heavily today

Even better. Thanks for sharing, I missed that.

Very shrewd piece of business imo

On 17 February 2023, the Group entered into an interest rate swap for a notional amount of up to $400m to fix the rate of interest receivable on US Dollar cash balances held in respect of the Group's client cash balances. With the interest rate swap, the Group receives a fixed rate of interest and pays a floating interest rate based on SOFR, the difference between the rates results in the Group receiving a fixed rate of interest. The contract commences in August 2023 and expires in August 2025 with a net interest rate receivable of 4.14%. Hedge accounting is applied in accordance with IFRS 9.

It makes me chuckle when investors in companies like ARGENTEX look towards ALPHA when making valuation comparisons. They use various ratios to determine how cheap their investment is compared to ALPHA. The problem is the are completely unaware that in most cases they are comparing their donkey with a racehorse.

As ever, another fabulous set of results for ALPHA. For me, without a doubt the best company on AIM

I referenced your AVA6000 valuation of £90m. I did not remark on your overall valuation of the company. I noted the reasons why in my view your valuation is low and indicated areas that you had neglected or forgotten when making your valuation e.g no consideration of milestone payments was made. Rather than address my points you just seem to be getting rather defensive.
You have put your views out there so don't be surprised if people critique them. I'm trying to have an open and reasoned discussion with you. I started a new thread as your original thread has just turned into a mud slinging contest.
Anyway, thanks for your efforts, you certainly created a bit of a storm on here this am

Luke has opened a good discussion but I disagree with his valuation. £90m for AVA6000 is way too low. I take this view for multiple reasons, a couple of which I will explain below.

One of the biggest issues I have with Luke's valuation is its entirely based on licencing AVA6000 at P2 for a miserly 10% royalty. No mention of milestone payments either. Lets face it, if Alistair Smith did this deal, he would literally be giving AVA6000 away and we shareholders would be livid. I certainly don't think Avacta would have any issue in raising the funds in order to commercialise AVA6000 considering P2 is likely to be pivotal. Even if it meant doubling the share count in order to take AVA6000 to market themselves, this scenario would be infinitely better than Luke's forecast. My point is, which ever route Avacta choose, basing it on a 10% royalty is very pessimistic and in my view unrealistic. At the very least you would expect royalties plus a very hefty upfront payment plus further milestones.

The next gripe I have with his valuation model is based around market potential. He has based his forecast figures on Doxorubicin sales of £1.98bn by 2028 (globenewswire.com). He points out this figure is for 100% market share. Basing his forecasts on this figure is highly floored for multiple reasons. If AVA6000 do take 100% market share then sales will far exceed £1.98bn. Why? Because Dox is an off patent drug that is marketed by multiple pharma companies. As a result, its relatively cheap. AVA6000 will be patent protected. It is therefore reasonable to assume the price of AVA6000 will be at least double the current price of Dox. I'm being very conservative here when you consider the price of other Precision drugs such as ADC's. We must also take into account it is likely a wider demographic of patients will be receiving higher doses of AVA6000 for longer, thus further increasing sales volumes vs standard Dox.