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Exploiting an earnings upgrade opportunity

A developer, manufacturer and distributor of products for the self-care market has made two earnings accretive acquisitions this summer and a forthcoming pre-close trading statement is set to prompt major earnings upgrades.
Exploiting an earnings upgrade opportunity
  • Earnings accretive acquisition of three oncology brands.
  • Potential to cross-sell and expand into existing distribution network.
  • Pre-close trading update set to prompt material earnings upgrades.
  • New £50m revolving credit facility provides funding for further acquisitions.

Aim-traded Venture Life (VLG:92p), a developer, manufacturer and distributor of products for the self-care market, is set to release a pre-close trading update in the coming weeks. Buying the shares ahead of the announcement is likely to prove a shrewd move.

That’s because we are guaranteed some hefty earnings upgrades from house broker Cenkos Securities who has yet to update forecasts even though Venture has made two earnings accretive acquisitions since early summer. As I noted previously, the £36m acquisition of BBI Healthcare, a highly profitable global market leading women's health and diabetes/energy management company, should add around £2m of cash profit to Cenkos’ current full-year cash profit forecast of £7m (‘On the upgrade’, 7 June 2021). The deal was financed entirely from the £36m Venture raised in a placing and open offer at 90p a share last autumn to fund its acquisition strategy.

Furthermore, Venture has just announced the acquisition of a number of oncology support products from Helsin Healthcare in a £4.7m deal that will be funded from the new £50m revolving credit facility the group put in place at the end of June. The products acquired are:

■ Gelclair, a muco-adhesive oral rinse gel used for the management of painful symptoms of oral mucositis (side effect of some cancer therapies). Gelclair is a registered medical device and is partnered in 40 countries.

■ Pomi-T, a polyphenol rich mix of wholefoods used for the management of prostate specific antigen (PSA) levels in prostate cancer. Polyphenols are organic compounds which have antioxidant and anti-inflammatory properties that can have positive effects on the regulation of weight, cell proliferation and on the metabolism.

Launched in 2017, Pomi-T is a registered food supplement and is partnered in 22 markets

■ Xonrid, a hyaluronic acid based topical gel used for the prevention and treatment of radiation induced dermatitis. Around 95 per cent of people treated with radiotherapy experience radiation induced dermatitis due to dehydration of skin cells. Xonrid is a registered medical device and is partnered in 21 countries.

Strategically, the acquisition makes sense as there is a significant opportunity for the group to expand the brands’ geographic footprint through Venture’s existing distribution relationships as well as cross-selling within its existing business. Also, Venture has been the contract manufacturer to Gelclair since 2000, so the integration of the brands should be relatively straightforward, thus reducing acquisition risk.

The deal makes financial sense, too. The total consideration of £4.7m equates to only 3.6 times the brands combined gross profit of £1.3m on sales of £2.5m in 2020, a year that saw a reduction in oncology treatments due to lockdowns. As the world recovers from the effects of the Covid-19 pandemic, and oncology treatments return to pre-pandemic levels (the brands made around £3.5m of net sales in 2019), then expect revenues and profits to recover, too.

The point is that after taking account the BBI and Helsinn earnings accretive acquisitions, I estimate that Venture is now producing annualised cash profit of £12m, or double the level reported in 2020. It wouldn’t surprise me at all to see Cenkos upgrade its 2021 cash profit estimate by a third from £7m to £9.4m to factor in the second half contributions from the acquisitions, and introduce 2022 forecasts well above £12m. That possibility simply isn’t in the price. Indeed, I reckon that Venture retains a relatively debt free balance sheet with proforma net debt of around £3m post the acquisitions to give an enterprise valuation of £119m, or only 10 times annualised cash profit.

That’s a low rating for a company that should generate revenue and cost benefits from both BBI and the oncology brands, and has an impressive track record of integrating acquisitions. Moreover, with a £50m credit facility in place, Venture’s management has scope to make more earnings accretive acquisitions to further diversify its portfolio.

Venture’s shares have doubled since I initiated coverage, at 45p, in my May 2019 Alpha Report, and offer 50 per cent potential upside to my 130p target price. Buy.

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