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HI Shamtown, I agree Destiny may not be the best comparison but there are similarities with patented products and blue chip customers/partners. They announced a Phase 3 distribution deal that brings in $20m in milestone payments in 2024 and sales milestone payments of $550m plus royalties on one product. Despite this the share price was hammered on the placing needed to cement this deal. The major US pharma company wanted to see financial stability in their new partner. It looks very likely with a new deal in the pipeline that the company will be self-sufficient in funds.
Your analysis of Ondo is similar to that I would make. Too often in the past I have reached conclusions, when the broker research had indicated otherwise, only to be eventually disappointed . Ondo broker's research note estimates pre-tax losses of £3.3m in 2023 followed by £3.4m, £3.1m and breakeven in 2026. Net cash/debt is estimated at -£6m, -£6.2m, -£7.5m and -£7.2m in 2026. This indicates a continuing drain on cash in line with the business model. Also, it does not reflect the loan and interest due to be repaid from 31.3.2025. Sure they may be cautious and Ondo may outperform on sales but this would create additional short term pressure on losses and cash flow. I still think the company needs about £5m to establish the sound financial base that will stand up to due diligence done by potential customer insurance companies. None of this detracts from the merits of Ondo's business and prospects as we are talking about the strains of growing a good business.
My thinking about 15p is that the placings market is very tough and we have seen so often companies being hammered on the placing price. This is especially true for small companies than need cash to finance growth when they are loss making. If you want to see a good case study look at Destiny Pharma's last fund raise. The Ondo price depends on market sentiment - I opted for 15p but could have easily put in 12p. Next year we are looking at a possible recession and a general election. Both could dampen market sentiment.
Ondo's new contracts are always good news but the pricing model means that in year 1 sales break-even occurs. It is year 2 that profits are generated. It's a great business model and the profits/cash flow is just a fact of this. the more Ondo delivers on it's strategy the more cash it needs to finance growth until a crossover point is achieved, i.e. year 2 renewals outstrip year 1 sales, or something approximate to that.
DD77 I think you are right about delivering on strategy being bullish, but the price reflects this best in a bull market, but i'm afraid market sentiment will be against us.
Yes, £5m is more what they needed. £1m is a short term fillup for working capital but they need more working capital for the next 12 months. They really need to show to big insurers that are not living from hand to mouth, and they have a solid financial base. 22.5p for the placing was a good price and my guess is that institutions wanted a much lower price for the £5m and that Craig Foster was not prepared to accept this.
Time will tell if this is right. The market knows Ondo want more capital and this will dampen the share price. Good news may well produce spikes in the price but I still expect to see a raising at less than 15p next year.
One issue important for me was that the dependence on one supplier for production of the device is lower risk than I thought. If I understood the comments correctly, the supplier has multi production facilities so that it could if necessary spread the production risk or have a backup in the case of any production disruption. Also, Craig mentioned seeking a foreign supplier to supply the US market. Good.
The other risk about it being a one product company was questioned today. That’s the good about this company: specialisation and focus. The downside might be that when hiccups occur there is not another product stream to cushion this. I think I can live with the hiccups. I know they will happen - they happen with all businesses. The consequences will be timescales for sales and profits, and stress on capital.
I cannot understand why jiggers points come for criticism. The fact is businesses never meet rosy expectations. Business life is not like that. The unexpected always happens and most managements are too optimistic. Good posts IMO cover the positives of a company and also the risks. Poor posts sometimes are those that only ever cover the upside and positives and never see the risks. I don’t need the comfort blanket of only reading positive posts. We will all make more money investing if we understand the business well and that includes especially the risks. Jigger is right in saying these posts will never affect the share price.
Turning to capital it is most unlikely that debt will be used solely, if at all. A growing company needs a sound capital base to cope with business hiccups and the financial consequences. Also, most importantly a small company like this needs a very healthy financial position to show large insurance companies it is serious, not living hand to mouth, has low financial risk and can guarantee financially that it will be in business tomorrow. We have all seen the auditors comments and such comments will not be good enough for the year end results. Large companies do their due diligence on their important suppliers, especially smaller company ones. So a fund raise will come, probably sooner than later, and the market will push the share price down to prepare for this. This is the way it always happens. I know it doesn’t make pleasant reading but this is the way the market works. In Ondo’s case I regard a fund raise as a positive as it will bring its finances and investor/customer perceptions up to a good level to match it’s superb business. There will be some dilution but if the company needs a more solid financial base then so be it.
Ending on another positive note, I had my concerns allayed as a result of the presentation today. I like the management.
A fund raise has to be dilution of existing shareholders as there is no way, IMO, a fund raise will be anywhere near the current share price if it is a meaningful fund raise. With another smaller fund raise investors will be asking how the company will repay its loan note and interest. Until that becomes transparent the fear will be that another more substantial fund raise, or several smaller ones, will come. Loan notes and interest will be some £7m and working capital needs will be around £2m+ per annum. To me it looks as if the share price will see historic lows again. Thankfully, interest rates appear to have topped and the AIM market may have bottomed.
I like this business very much but I don’t like the company’s finances. I will like it a lot when it is debt free but then we may have at least twice the number of shares in issue.
Main concerns are not the business and the business model but debt and "Material uncertainty related to going concern." from auditors. The question is how much cash will the company need to raise to finance growth and repayment of the loan notes? And when? And when will growth in the company's business throw off sufficient cash to contribute to repayment of the loan notes of £6.4m plus rolled up interest?
With the company's change in pricing strategy from selling units to effectively leasing them, which I like, it does mean a slower growth in cash flow but a more sustainable one as the CEO said.
A good business leveraged by the loan notes costing 12% pa from 31.3.24. Shame about the loan but without it the share capital would have been much higher.
Because of all this its difficult to see where the share price is heading until business performance answers these questions. All IMO.
I think the market is aware of MBU's situation, which is why a sale of some of their BC shares looks likely. The market has held the BC share price down for this reason.
My analysis of Bens Creek is very positive and the business case has been well aired on this BB. I think the management and the assets are outstanding. The one thing which is a major negative for me is the 50%+ MBU shareholding. Despite whatever good intentions MBU has, and I think they have been a good influence on BC, there is always the risk that a dominant shareholder might take actions to suit himself to the detriment of other shareholders. I am not suggesting that MBU would do this but the risk is there. There are other examples on the market where this has happened and the market will be aware of this risk.
If MBU does sell a 30% stake in the business it can, IMO, only be good for the business and share price.
MBU’s net assets could now be around £40m, represented almost entirely by its shareholding in Bens Creek. The group appears to be in a vulnerable position based on interpretation of the accounts filed for the year ended 31st March 2022. It could only require one default on its loan obligations to cause a crisis for the group. Also the group will need a clean audit report of the financial year ended 31st March 2023. We should expect management of MBU to try to take action where the accounts show a going concern and to avoid any possible defaults on its borrowings. It is very difficult to see if this can be achieved due to the illiquid assets, apart from the shareholding in Bens Creek Plc.
If MBU wanted to diversify the shareholder base of Bens Creek it would have done it at 91p not 18p. The recent share sale has all the hallmarks of a forced sale by MBU.
In the reported accounts the Group stated that the investment in the AIM listed company is a liquid asset which the company can dispose, post 19 October 2022, as and when required to realise cash and meet ongoing liabilities. The analysis of MBU’s accounts suggests that MBU has this intention and further sales of its holding in Bens Creek will be necessary.
We do not know the precise financial structure of MBU Group, which banks are involved and whether they could recover their loans through a liquidation. However, any action by creditors could lead to further sales from the shareholding in Bens Creek Plc
Unless MBU’s financial circumstances have changed for the better, it appears likely that MBU Group will sell more of its shareholding in Bens Creek. The market will be aware of MBU’s financial position, just as we are, and act accordingly to ensure that any further share sales are made at the lowest possible price. MBU Group achieved 18p per share for sale of its 5.92% shareholding. If MBU brings a larger shareholding to the market it would be anyone’s guess what price would be achieved.
Unless MBU has been able to sell properties or non-listed investments, it appears to be entirely dependent upon its holding in the AIM listed company to finance the business and to repay loans. We do not know what cash flows from other business activities have been in 2022/2023. We do know that MBU sold shares in Bens Creek at 18p for £4m. Based on the accounts of the Group this sale of shares appeared to be a sale initiated by MBU to repay borrowings (probably to Bluestar Global Capital Limited) rather than to diversify the shareholder base of the company as stated by MBU.
Debtors include £4.8m from entities that have the same director(s) as in MBU. It’s impossible to find out if this debt is good and collectible. Effectively, MBU has borrowed money and then lent it to an entity with the same director as in MBU. We can only deduce this other entity did not have sufficient credit worthiness to borrow the money from a lending bank. So how good is this debtor?
The subsidiary company placed in liquidation indicates the precarious nature of the Groups operations and finances.
Creditors due within this financial year were £22.7m, of which £10.6m were due to bank loans and amounts due to the tax authorities. £4m appears to fall very short of what was needed. So there may be further sales of MBU’s holding in Bens Creek before the end of MBU’s financial year ended 31st March 2023.
In addition, £28.7m bank loans are due to be repaid within 12 months from 1st April 2023. MBU will undoubtedly be hoping to see Bens Creek share price rise in order for it to be able to generate further cash flows through share sales in Bens Creek. It is difficult to see where the cash can come from apart from sale of Bens Creek shares.
It appears from the accounts that the banks have inadequate and illiquid security for their loans totalling £37.6m to the company. They can either wait and hope that the Group’s financial situation improves or put the Group into liquidation and seek to recover their money from the net assets that currently exist, i.e. the shareholding in Bens Creek Plc.
The shareholding in Bens Creek Plc is worth £37.8m at the previous sale price of 18p per share.
Another area of concern is that there are “Other loans” secured by a fixed and floating charge on the company’s assets, which includes a fixed charge on properties and on the shareholding in Bens Creek. We do not know the terms of these loans.
The major concerns about the Group appear to be:
1. It is a high risk and highly leveraged business with total creditors of £51.4m and illiquid assets of £43m, (being non-liquid capitalised development and finance costs and amounts due by joint ventures and associated undertakings and other) and a shareholding in Bens Creek worth currently £41.9m.
2. Some other businesses with more prudent accounting policies might choose to write off property development and finance costs as they are incurred. It depends on the nature of the spending. We do not know what this was for MBU.
3. Apart from the investment in the AIM listed company the business is in property development in the UK and in emerging markets as well as a portfolio of unlisted business investments.
4. With the increase in interest rates and looming recessions the environment for the property market has deteriorated and risk/potential liquidity has worsened.
5. The capitalised development and finance costs of £37.3m will only have a value and cash flow if this cost can be translated into the sale of properties.
6. The debtors falling due within 1 year to 31st March 2023 of £5.4m are mainly amounts due by joint ventures and associated undertakings and appear illiquid.
7. Based on the accounts it is not possible to see how the company can pay creditors falling due before 31st March 2023 of £22.7m
8. The company appears not to have been paying bank interest but capitalising it.
9. Creditors falling due in the year from 1st April 2023 appear to be all bank loans totalling £28.7m. The accounts state all bank loans are secured on properties but it is not possible to ascertain their value and how they can be turned into cash to repay the banks but see note 13 below.
10. The company had cash of £0.5m.
11. During the year the Group engaged in transactions with entities in which there are directors in common. These entities owed the Group £4.8m.
12. A subsidiary company was placed in liquidation in February 2022. This company had net liabilities of £30.6m and this was accounted for as a profit on disposal before tax. The Group said that control was lost at the date of appointment of the liquidator and as such it was deemed to be a disposal. In other words the liquidation relieved the Group of net liabilities of £30.6m and this was treated as a profit.
13. Freehold properties at 31st March 2022 amounted to £172,727 at valuation.
14. The Group has 23 subsidiary companies.
15. The Group has 20 employees and wages and salaries are £2.3m.
16. In 2021/2023 bad debts written off were £4.1m.
“The Group's portfolio of unlisted /associate investment holdings spans several sectors which it anticipates will materially enhance the overall value of the Group as these business progress from start-up / early-stage operations to fully profitable businesses. The Group's investment In these businesses is by way of equity investments and loans convertible to equity.”
Having read what the directors say above, it was necessary to investigate the accounts further to see what facts emerge and what deductions could be made.
At 31.3.2022 the Group had net assets of £185.3m which included Bens Creek valued at 91p per share for £191m. The directors statement said: “Since the financial year end, the Group saw its investment in an AlM Listed company fall from £0.91 per share at the year end to £0.295 per share at the date of signing the audit report. This represents a reduction in the fair value of the investments from £191m to £62m based on the share price at the date of signing the audit report (18th October 2022).
MBU sold 22,222,222 shares in Bens Creek at 18p on 7th February 2022. At that price the remaining MBU holding of 190,579,479 shares (50.8% of the total shares issued) were worth £34.3m. At today’s price (15th February 2022) of 22p the holding is worth £41.9m.
MBU consolidated accounts show:
• Non-liquid capitalised development and finance costs of £37.3m.
• Debtors falling due within 1 year of £5.4m – mainly amounts due by joint ventures and associated undertakings and other.
• Creditors falling due within 1 year £22.7m including capitalised interest of £2.2m – bank loans £8.9m, taxation and social security £1.7m, other loans £9.4m (secured by a fixed and floating charge over the company’s assets including a fixed charge on investments). It appears this charge is held by Blue Star Global Capital (a family controlled company) whose business is described in the return to Companies House as wholesale of perfumes and cosmetics and credit granting by non-deposit taking finance houses and other specialist consumer credit grantors. This is a very complex charge agreement and the Covenant to pay states “The borrower shall, on demand, pay to the lender and discharge the Secured Liabilities when they become due”. But I have not been able to ascertain the date when these liabilities become due as there appears to be no timescale in the Details of Charge.
• Creditors falling due 1 – 2 years (which appears to be in the financial year beginning 1st April 2023) £28.7m – all bank loans. The accounts state all bank loans are secured on properties but it is not possible to ascertain their value and how they can be turned into cash to repay the banks. The accounts state leasehold properties are worth £0.5m and investment properties £properties are worth £172,000. As mentioned below capitalised development costs are £27.8m but we do not know what this represents or whether it is a valid security for the bank loans.
• Tangible fixed ass
I prepared this analysis in mid-Feb that explains the MBU position
MBU Capital Group Limited
As a shareholder in Bens Creek Plc there are two main considerations: the fundamentals of the business which I have researched and reached a positive conclusion; and, the shareholding of the MBU Group and what this could mean for Ben’s share price.
The RNS dated 7th February 2023 stated “the Company's largest shareholder, following demand from institutional investors, has today sold 22,222,222 ordinary shares in the Company ("Ordinary Shares") at a price of 18p per ordinary share, equivalent to 5.92% of the existing issued share capital of the Company, to diversify the shareholder base of the Company”.
Immediately on reading this I thought it did not seem right. Directors or companies sometimes make the statement of selling shares to meet institutional demand when a share price is high and the shareholder can realise substantial gains. It’s usually code for saying I want to realise a good gain without worrying shareholders. In all cases I view such a reason with suspicion. To my knowledge it is unusual to make this statement when shares are sold at a low price.
In this note I have investigated other possible reasons for this share sale to try to understand the situation and whether other share sales by MBU might be forthcoming..
MBU Capital Group accounts year end was 31st March 2022 and the auditors report was dated 18th October 2022 when the accounts were filed with Companies House. The main investment was in Bens Creek Plc where the IPO valuation was £35m.
Previously the MBU Group’s main focus was on property developments. The accounts state that
“It is expected that the purchase and subsequent sale of the property will both be completed during the first quarter of 2023.” and “The group also owns a property in Central London, which is subject to an appeals process, which is expected to be concluded during the last six months of the current year to 31 March 2023. The planning application relates to a commercial building which will be demolished and a new purpose built student accommodation constructed. The planning process and its outcome has been somewhat convoluted over the last two years. having been severely impacted and substantially delayed due to the Covid-19 pandemic along with changes to building regulations particularly in central London. We anticipate a successful outcome to our planning application and consequently expect to generate a profit, during the second quarter of 2023 despite the delays that we have been experienced to date.”
The accounts also state “the Group is now exploring re-entering this property market having targeted a pipeline of potential assets in a number of developing countries.”
During the announcement of the deal with Sebela and the recent placing The Sunday Roast team commented that without the placing the price would have gone to 100p. But here we are with a price of 27.75p and a dribble of sellers. Can we expect the price to continue to drift?
I'm not going to go over the fundamentals of the business as readers will have done their own research. Research by Equity Development gives a NPV value per share of 245p after the recent increase in shares from the fund raising. Also, they expect no further fund raisings.
https://www.equitydevelopment.co.uk/research/onwards-and-upwards
In the FinnCap research note of 27th February 2023 they have an NPV valuation of 285p and they slot in for 2023 an XF-73 Nasal partnering deal. During the recent presentations about Sebel it was indicated that XF+73 partnering deal was running around 3/4 months behind the M3 one, so we may get news in June/July. The XF-73 is a larger market than M3 and the financial deal will be larger.
Sebel will pay $9.5m at the start of Phase 3. The current share price is 27.75p and the market cap £26.2m. In this case Warren Buffet may be proven right about the patient investor. We will see.
The contract intrigues me as well. Exceptional partnering deal for Destiny’s NTCG-M3 product in the USA which provides that partner Sebela Pharma will pay for Phase 3 trials, FDA registration and US launch costs which could be in excess of $60m.
Destiny was required to raise capital as part of the deal so as far as I can see, Destiny is unlikely to raise cash again.
The best part is that future M3 partners for ROW, except Japan, will not need to develop or licence the product so we can expect a much higher up front payments.
With XF-73, and a well funded Destiny, we can also expect a much higher up front payment from the initial and subsequent partners.
With such an excellent management team, 2023 is looking good IMO.
It looks as if the major XF-73 product partnering deal is not too far behind this one, perhaps a few months. So we can expect something similar but larger.
Good to see directors also bought shares in the placing.
Exceptional partnering deal for Destiny’s NTCG-M3 product in the USA which provides $20m in upfront payments followed by development and sales milestone payments of $550 million plus double digit royalties on sales. Also, the partner Sebela Pharma will pay for Phase 3 trials, FDA registration and US launch costs which could be in excess of $50m. Wow! This is a great deal IMO.
The deal was conditional on Destiny improving its balance sheet through the issue of shares. To get a fund raise away in this market must have been tough with the investors really calling the price.
Not bad as Destiny acquired M3 for $3m in 2020!
The M3 deal was for the USA alone so we can expect similar deals for the UK/Europe and other countries. Plus we have the remaining pipeline of products. This deal is just the start.
This presentation by Mark Mills explains it clearly. Copper starts 16 minutes in.
https://www.youtube.com/watch?v=sgOEGKDVvsg