Venture Life (VLG:39p), a Bracknell-based company that develops, manufactures and distributes products for the self-care market, has entered the second half with an order book up 35 per cent year-on-year and is on track to more than treble its annual pre-tax profit to £2.3m as house broker Cenkos predicts.
The product portfolio principally targets the regulated over-the-counter segment of the consumer healthcare market and includes medical devices, food supplements and dermo-cosmetics, proctology and health of skin and hair, all of which are sold in compliance with EU regulations. They are typically sold into pharmacies through Venture’s growing international network of more than 100 distribution partners across 44 countries worldwide and are generally protected by intellectual property rights such as patents and trademarks. Both medical devices and cosmetic products are manufactured from a facility in Italy by Biokosmes, a company acquired by Venture at the time of its public offering in March 2014.
Around 70 per cent of Venture’s first half revenue of £9.4m was derived from manufacturing activities and the balance from selling consumer brands. Owned brands include a range of premium products sold under the UltraDEX and Dentyl brands such as mouthwashes, toothpastes, tooth whiteners, and fresh breath beads. Both brands have been acquired by Venture since its initial public offering with a view to growing their sales internationally using the company’s distribution channels and delivering incremental profit growth to supplement the organic growth from existing businesses.
This has been happening. Venture has signed two agreements with its Chinese partner which will see Dentyl Fresh Breath Beads launch in the second half of this year, and Dentyl Toothpaste in 2020. Commercial director Sharon Collins told me during my results call that the same distribution partner launched UltraDEX mouth spray into China earlier this year and sold out the 10,000 units ordered within a day. It has since taken a larger follow on order. The Chinese partner has also been investing heavily in its sales and marketing activities, which augurs well for Venture. It’s not the only deal either as Venture’s French partner, La Brosse et Dupont, will launch Dentyl into the mass market in 2020 after the company reformulated the product for the European market. Further international deals are in the pipeline, too.
Another key take from the interim results is that Venture invested £200,000 in development spend in order to assist healthcare partners to upgrade their medical device products. It’s money well spent as recent changes in regulatory rules make it obligatory for customers to undertake a review of their medical devices to ensure that they comply with the new regulations. Venture is undertaking these reviews both for its own products and customers' products as the directors believe that the new compliance will secure significant future revenues for the company as a consequence. I agree.
The scope for the company to scale up operations significantly by making additional acquisitions was the main reason why I suggested buying the shares, at 41p (‘A profitable venture for accelerated profit growth’, 1 July 2019), having highlighted the investment case earlier in my May Alpha Report. Bearing in mind the potential for corporate activity, Venture is even more cashed up now to make an earnings accretive deal as it generated free cash flow of £0.85m from operating cash flow of £1.3m in the first half to boost its cash pile to £10.9m (13p a share). The company has £4.5m of low-cost debt on its balance sheet, but this is only charged at an interest rate of 1.4 per cent or less, so it makes sense to recycle the growing cash pile into acquisition(s) rather than paying down borrowings. Chief executive Jerry Randall says that the directors have whittled down over 70 acquisition proposals to a handful that are being looked at. Vendors are predominantly larger companies that are rationalising their brand portfolios to focus on bigger assets, so are offloading sub-scale non-core brands as a result.
Even without factoring in likely earnings upgrades from acquisitions, the rating is hardly expensive. Taking into account upside from international deals and the investment made in the business, Cenkos Securities expects 2020 pre-tax profit and earnings per share to rise by a third to £3.1m and 4p, respectively, driven by an 8 per cent increase in revenue to £23.7m, the latter highlighting the operational leverage of the business. On a single-digit cash-adjusted price/earnings (PE) ratio, the shares are worth buying.
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