RE: IC24 Sep 2020 13:49
Venture Life on a roll
When a company with a relatively fixed cost base has the manufacturing capacity to materially increase sales, the impact on margins can be dramatic as a higher proportion of incremental revenue is converted into operating profit. That's exactly what's happening at Aim-traded Venture Life (VLG:102p), a developer, manufacturer and distributor of products for the self-care market, as its manufacturing business scales up production from both third-party contract work and brings production in-house from earnings accretive acquisitions.
The company has also been signing a raft of deals for its key brands. These include Dentyl and UltraDEX (mouthwashes, toothpastes, tooth whiteners and fresh breath beads), and the most recent acquisition, PharmaSource, a distributor of a range of medical device products (for fungal nail infections, wart removal and women's health).
Earlier this year Venture signed its largest deal to date, a 15-year agreement worth €168m (£154m) with its existing Chinese distribution partner (rights in China, Macau and Hong Kong) for Venture’s Dentyl brand (including mouthwashes, toothpastes, tooth whiteners and fresh breath beads) and other products. In the first half, the partner placed €4m of orders for Dentyl alone and contributed £2.3m to Venture’s revenue of £16.9m. The company’s like-for-like sales increased 65 per cent in the six-month period.
The company has also been launching new products including a hand sanitising gel, DISINPLUS, which has been flying off the shelfs at ASDA and at other retailers, contributing £3.2m to first half revenues. Venture has expanded the range to eight products, including anti-bacterial sprays, at minimal cost, thus providing another lucrative revenue stream for the years ahead. In the UK, Boots will launch the Dentyl range (including new products) across 800 of its key stores in November.
The impact of the eye-catching sales growth has been dramatic on Venture’s profitability. Gross profit doubled from £3.5m to almost £7m on £7.5m of incremental sales, and with operating costs only rising by £0.8m to £4m, the company’s underlying operating profit shot up to £2.3m, from break-even a year ago. Analyst Chris Donnellan at Cenkos expects full-year pre-tax profit to rise from £1.3m to £3.3m on revenue of £30.3m to produce adjusted earnings per share (EPS) of 5.3p, up from 2.2p in 2019. He has also introduced 2021 forecasts which point to pre-tax profit surging again to £4.6m on £3m higher revenue as a higher proportion of the extra gross margin earned falls to the bottom line. On this basis, expect 2021 EPS of 6p. These estimates exclude any contribution from further earnings enhancing bolt-on acquisitions. Venture has net cash of £6.6m (8p a share) to deploy and low-cost debt facilities, too.
The positive news flow explains why Venture’s shares have more than doubled in value since I outlined the investment case, at 45p, in my May 2019 Alpha Report, and are c
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