The latest Investing Matters Podcast with Jean Roche, Co-Manager of Schroder UK Mid Cap Investment Trust has just been released. Listen here.
Its all a bit painful at the moment Blue. The primary architect of our current predicament is the massive increase in operating costs in last three years with minimal impact of sales growth. From what I can gather we have gone from $11m in 2020; $33m in 2021; to $40m so far in 2022 with Q4 to come (Q3 was $14.5m) - with current revenue of c.$1m per quarter. So we are likely in the region of $53m/54m operating costs full year 2022. Trimming $12m sounds a good start - but you have to ask - what on earth are we spending $4m+ per month on? If you look at where we spend money - in 2022 alone so far we have spent $12m in R+D costs - these are the costs of our 'partnerships' with health systems including Sinai where Renx picks up the costs of clinical studies and licencing costs. In addition we now have convertible loan repayments to make - settled in cash or additional ADS shares. Have to agree with your comments on our financial management - and the market price for the business reflects this lack of confidence in addition to wider marco issues. SB
The issue of cash burn has not been helped by inconsistent reporting - quarterly increases when the company had indicated the opposite, 24 month runway, then 12 month......which apart from increasing overheads we have to assume is linked to the sales target failure - not so long ago Sinai alone was at 300 tests a week, then 10,000 pa......factor in that reduced income and no wonder we are left trying to second guess when more funds will be required. Raising cash in equity markets without FDA could be very painful. I like to think we have enough cash until mid 2023 - but that still means we have less than 12 months and that is not a good position to be in. That said - the previous reference to selling $50m ADS chunks on nasdaq can't have been on a whim....surely?
Iowa was news to me but the 8.1m Illinios deal was highlighted in the Q3 results unhooked. What is different is the specific reference to the private healthcare market in those territories in addition to the medicare coverage - so perhaps there is an indication of traction in private physician's looking to book tests based on the ongoing positive clinical proof of concept evidence. SB
We already knew that Illinois health providers were signed up to KIX with insurance coverage - perhaps the change in narrative here is that the company will focus its efforts on commercialising those markets which in basic terms means selling and processing tests. What is missing here are the sales targets themselves but at least there is an acceptance we should focus on driving sales with current systems rather than trying to expand our footprint at the expense of actually securing revenue. Clearly tied to this is the need to reduce cost in the meantime - and good to see progress being made here also. Will be good to get further clarity on this but might have to wait until FY 2022 results (October?) for an update. SB
Thanks rivaldo. Never quite sure on what basis these p/e forward prices are based. Same goes for the ‘in line with management expectations’ and ‘current guidance’ type RNS announcements. As PI’s we mostly live in a world of financial shadows trying to second guess what these references really mean - don’t get me wrong I can do the math - but there’s a lot of inconsistency across the board. ATB. SB
That’s an interesting point on automation andypa- makes sense - I just assumed it was an IT administration issue to make the processing of tests quicker from order to result. Linking the original DNA of Renx into a healthcare population sounds a more appropriate use of our tech. Quite a few questions mounting up which the company really needs to think about addressing - on the basis we appear to need a shed load of funding and I can’t see mills and Sinai stumping up those Sums - and debt is going to get a lot more expensive and our balance sheet is in no state for that anyway. SB
Covid now in the rear view mirror - new business growth now well underway. Will be good to see some contracts in place for the new fermentation capacity which will start to come on stream later this year. Looks we are also into lots of diagnostic testing opportunities to build on the lab testing capacity we have. Singer happy with update - although have not updated their target price from 62p. Bit of a subdued reaction - looks like this will be slower to recover than we might have thought but every reason to be confident about the future. SB
Blue - there is reference to some automation in Q4 which held back testing volumes - and the company has already provided feedback that full year revenue will be c.$2.9m - which might be the IT point you were referring to. Disappointing is an understatement. imo are several large elephants in the room which need up be addressed. Why do we have so many health systems signed up who do not actually process any tests. Why do we build a business overhead way ahead of income. Why does management make comments on quarterly overhead reductions which appear untrue. Why the disconnect between mgt and shareholder commentary on expenses. What impact did the company think would happen to the share price when it announced a potentially hugely dilutive $300m share issue. As for FDA approval……that’s pretty much an all or nothing moment - and any fund raising is likely to require that to be in place - all imo. SB
Not sure about a telegram group andypa - more like an SOS!! I have made points in the past about partnerships - as it stands they cost us due to the licensing arrangements which are in place. The Sinai agreements works that way - we get revenue for testing but that is offset against the licence fee we pay Sinai to access data and the patent ‘fee’ which is part of the clinical validation strategy. So unless partnerships are linked to actual revenue for Renx they are just a cash drain. We only have enough cash until the end of 22 at current rate of spend. We have a great product but it has no commercial uptake based on current evidence. We are nearly 8 months into 2022 and not one positive announcement which was expected this calendar year. No investor interest apart from Mills and Sinai. $1b in lost investor value. Last chance saloon? SB
Chelsea - FWIW - my take is that yourgene have a product which needs distribution outlets and laboratory testing facilities to tap into US primary care physician market decision making - forming partnerships with existing businesses provides scale and capacity for the infrastructure required to move quickly and establish a foothold in the NIPT market. So it would make sense to have a number of partners to provide that scale. EKF - with their ADL lab capacity need to replace COVID testing with new testing products and looks like yourgene have a number of interesting products coming to market once approved. Only issue with NIPT is the recent US ruling on terminations and the impact this will have - its a huge potential market but lawmakers appear to have thrown a huge spanner in the works….SB
Second quarter better than first as Johnson added some volume. On track for a £500m revenue business and getting close to 20% EBITDA - and 7p eps full year. Currently trading at 4 x EBITDA….really?!! Strong update and does confirm the value being created here - would still like to hear some management thoughts on our buy to build strategy in current funding climate, cash allocation and regional performance - but assume this will be captured with the full H1 results. Share price appreciation mid term likely to be linked to shareholder return beyond capital appreciation. The company could consider the intro of a small dividend starting next year to encourage investors. SB
Should get a trading update next week. 9 months into the ADL purchase - will be good to hear how that is going - if targets are hit ($5m EDITDA) there is additional consideration due over next three years. We will also be able to see how much cash we are generating per month in the knowledge we had £21.2m on 31st May if they let us know current cash balance as at 30th June. 1.2p dividend is 3%+ yield based on current share price. I'm adding now we 'seem' to have reached the bottom of the recent collapse. SB
spindok - the reason most of us are here is that we had confidence in SRC's management team and their buy to build strategy. 12 months down the line for the Nordalk deal I am pretty sure SRC would not have paid £400m for a business predominantly located in Finland with a 1000 mile land border with Russia - with the companies largest quarry 20 miles away from Russia. I do think the company has very harshly marked down - and certainly way beyond a % risk factor being applied to the businesses operations in eastern Europe - but loading the business with debt to purchase Nordalk alongside all the wider macro economic issues - its difficult to have predicted a more damaging outcome for the last 12 months. It will be very interesting to get an update from the team - Q1 trading appeared on track - and the construction industry is busy, despite the doom and gloom being thrown around. ATB. SB
Another major sell today - it was yesterdays 750k morning sale (pus the delayed 400K sale) that started all kinds of mayhem - auto trades took hold as soon as the price dipped below 50p and triggered stop losses. Big question is - who is selling at this price and why - have Rettig started to offload after 12 month lock in expired? Just over a year ago the business was valued at c. £270m with c.£40m debt - 'net' value £230m taking debt into account. A year later, having bought Nordalk for £400m and now carrying £160m debt we are now valued at £325m - 'net' value £165m taking debt into account. So the entire value of the Nordalk purchase and more has been lost over the last 9 months. Difficult to blame the team for the Nordalk purchase given it looked a good deal and added considerable scale to the business - but given the primary business operations are in Finland, Sweden, Poland and Estonia its clearly driving market risk attitude and more worryingly there appears to be a major seller even at this price. Will be good to hear how the company views all of this this. SB
I'm with you vig - I saw a decent business strategy and a decent team who were delivering said strategy. How thing's change - and leave us looking at our investment wondering if its just market conditions or is there is more to this than current sentiment. With so many purchases over the last 2/3 years there's a lot to amortise; and we are about to start paying the Nordalk purchase loan which ramps up considerably over the next three years. The term loan and banking facilities in place have both fixed payments and sonia linked repayments - so higher interest rates will start to bite - imo using the company's estimated £60m annual free cash flow from its full operation to repay some debt would not be the worst idea in the current climate. A significant chuck of director options are granted in the range 25p to 46p and are due over next 4 years - so they are not immune from current share price decline. That all said - the construction industry is busy - so eastern Europe aside we should have a well performing business. SB
Nothing yet vig - although historically there is no real timing pattern for trading updates so not actually sure when we might hear from the company - other than given the recent price action here you would think a market update would be in order to reassure investors and such I think we can expect to hear in next 2/3 weeks. In addition to financial performance - I do think there is a broader communication required here on the buy to build strategy in the current market taking into consideration cost of funding (capital and equity) together with macro economic outlook. If we are generating significant free cash flow - now might be the time for a share buyback (assuming still no dividend policy) ......drives eps which is where a slug of options crystalize for max and co in 2024 from memory. There was the recent introduction of Polar Capital as a major shareholder with 5% - so someone sees decent value here. ATB - SB
FOTP - I think the UK and US shares are pretty much aligned - there is always a little bit around the margins and exchange rates to be factored - plus £ v $ has been taking a battering. Price in US is c. $2.50 - about £2.10 - divide by two as a single US ADS share is the equivalent of two UK shares - and you are at £1.05. The current price spread is simply ridiculous......! SB
No problem Chelsea. I think we we will get an update next week. We already know they have added to their cash pile - now sitting on £21m - and although sales will clearly decline post covid we should see a final benefit in H1 2022 revenue with H2 2022 and beyond continuing to benefit from core business growth, ADL and the fermentation capacity investment. If the £16m EBITDA is accurate; and we get anywhere near £25m in two years - the present valuation is trading at an increasingly large discount. It is very unlikely this will continue when the markets turn - the issue is when that occurs! SB
First time I have seen an EBITDA forecast for 2022 performance - from Oryx " The company's management team continued to deliver on the stated strategy of taking cost out of the business while driving sales through its international distributor-led model. The company is now profitable for the first time and expects to generate at least £4.1 million of EBITDA in 2022, a remarkable achievement given the group had lost £25 million of EBITDA as recently as 2019. The balance sheet is robust with circa £13.5 million net cash and management have expressed confidence in Circassia's ability to outperform market expectations. "
If the business can continue to grow its revenue through it low overhead sales model this bodes well for the future. SB
From OIG annual report:
"The company had a strong performance during the year, with sales growing to £83 million from £65 million and Adjusted EBITDA of £26.5 million. Sales will normalize in 2022 as the uplift from pandemic related sales declines materially. The core business continues to perform well, with £16 million of EBITDA anticipated in 2022 as global healthcare systems come back online. The company has deployed capital with the acquisition of ADL Health, a United States ("US") Clinical Laboratory Improvement Amendments certified laboratory as well as a new strategic partnership with Yourgene Plc to broaden the product offering. The business is well capitalized and has net liquidity of circa £17 million. "
" The outperformance in 2021 was driven by investor sentiment around its Covid-19 related products, but the soaring share price has now been brought back down to earth as the pandemic eases. The core business continues to deliver, with £16 million of Earnings Before Interest, Taxes, Depreciation and Amortisation ("EBITDA") anticipated this year, growing to £25 million by the end of 2024. The current valuation is low for a high-quality diagnostics business and with time, we hope the market will recognize this."
SB
Given the ongoing turbulence here I would not be surprised if they were sells - fund managers trading positions wrecked all over the place. At 50p you have to think the directors would have a nibble at this price. Next weeks update will certainly make for interesting reading......given some doom being issued by housebuilders which seems to fly in the face of actual performance. SB