- Cenkos upgrade current year Ebitda forecast from £7m to £8.4m and operating profit estimate from £4.6m to £5.6m.
- 2021 EPS upgraded from 3.79p to 4.53p, implying 10 per year-on-year growth (Cenkos)
- 2022 EPS estimate of 6.21p introduced for 2022 factoring in full 12-month contribution from 2021 acquisitions and modest growth in legacy business (Cenkos).
- Net debt of £5m post acquisitions set to fall to around £2.1m by year-end.
It’s not often that a company releases a trading update, analysts upgrade their current year EPS estimates by 19 per cent and introduce estimates that indicate 38 per cent EPS growth next year, and the share price sheds a third of its value. However, that is exactly what has happened to Aim-traded Venture Life (VLG:65p), a developer, manufacturer and distributor of products for the self-care markets.
Clearly, investors have been spooked by news of materially lower sales of hand sanitising gels and sales of the company’s Dentyl products to its Chinese partner. In the first half of 2021, these two segments delivered £0.3m of combined revenue, down from £5.5m in the first half of 2020, which explains why Venture’s first half revenue declined from £16.8m to £13.8m. Please note the latter figure includes a £1.1m revenue contribution from the recent acquisition of BBI Healthcare, a highly profitable global market leading women's health and diabetes/energy management company. Excluding these revenue streams, Venture’s other legacy businesses performed well, delivering 9 per cent higher revenue of £12.4m in the six-month period.
The shortfall prompted house broker to rein in its 2021 revenue estimate from £33m to £29.2m for Venture’s legacy businesses, before accounting for the contribution from this summer’s earnings enhancing acquisitions which has prompted earnings upgrades. Though that’s disappointing, it is in no way a disaster given that the same businesses posted revenue of £30.1m in 2020, so effectively their revenue could only decline by 3 per cent year on year. I am not sure that many investors selling out have grasped this fact.
True, the overstocking of hand sanitising gel in retail channels (that resulted from panic buying last year) will take time to unwind, so the contribution from this opportunistic segment isn’t going to be anything like last year. However, analysts weren’t factoring much in the way of second half sales in any case.
More importantly, Venture’s partner for Dentyl in China is still suffering from the effects of the Covid-19 lockdowns in 2020 on its offline business, so is not taking new stock at the rate anticipated when it entered the distribution agreement in 2020. With a debtor balance of less than £300,000 outstanding, below the provision made in last year’s accounts, Venture could terminate the distribution agreement, as it’s entitled to, and take its business elsewhere effectively at nil cost. Chief executive Jerry Randall confirmed that he is talking to other European based companies which have operations in China with a view to entering an agreement with them unless the current distributor fulfils its obligations.
Mr Randall also points out that Venture’s order book (pre-acquisitions and excluding orders for the China partner) is higher year on year despite the lockdowns across many markets, and expects Venture to produce meaningful revenue and profit growth in 2021. Unfortunately, the lack of earnings guidance in last Friday’s trading update has left retail investors in the dark, which has exacerbated the share price fall. I can shed some light on the matter.
Crunching the numbers
House broker Cenkos Securities produced a detailed note for clients which included material earnings upgrades, even if investors have ignored them, or perhaps more likely are simply unaware of them.
The broker expects BBI to produce annual gross profit of £6.1m on revenue of £10.5m in 2021, and has taken a seven-month contribution from this high margin (58 per cent) business in its 2021 forecast. Cenkos also expects the more recent acquisition of Helsin Healthcare’s oncology support products to deliver 2021 gross profit of £1.3m on sales of £2.5m, and has embedded a five-month contribution into its 2021 forecasts.
Combined the two acquisitions add £6.74m to 2021 revenue which when added to Cenkos’ £29.2m reduced forecast for Venture’s legacy business means that annual revenue should still rise 20 per cent to £36m. On a gross margin of 43 per cent this produces gross profit of £15.6m, up from £12.8m in 2020 and £14.3m previously forecast, hence the upgrade in current year Ebitda from £7m to £8.4m and the £1m upgrade in operating profit to £5.6m. On this basis, earnings per share (EPS) rises by 19 per cent to 4.53p. Mr Randall is comfortable with these forecasts. He also notes that proforma net debt of £5m (after accounting for all acquisitions) should unwind to Cenkos’ forecast (£2.1m) by the year-end after factoring in the second half profit contribution and working capital flows.
More importantly, the cost savings (staff costs, facilities etc) and revenue synergies (extension of distribution agreement into new territories) from BBI underpin bumper profit growth in 2022, hence why Cenkos believe that BBI can contribute £7m of gross profit (up from £6.1m forecast in 2021) on £12.1m revenue next year. Analysts also believe that Helsin will generate gross profit of £1.6m on revenue of £3m in 2022, too, a sensible prediction given that sales are set to rebound as hospitals restart oncology treatments post pandemic.
2022 earnings growth materially under priced
The point is that the contribution from both acquisitions accounts for 40 per cent of Cenkos’ £21m gross profit estimate for 2022 and a third of its £46m revenue estimate. Their contribution de-risks the investment case by diversifying the product offering, while offering a source of profit growth by reinvigorating the brands through self-help measures. Moreover, the acquisitions generate higher gross margins, which is why Cenkos expect Ebitda to rise from £8.5m to £11.95m in 2022.
To put that figure into perspective, it’s more or less in line with the upgrade I was looking for in my article last week (‘Exploiting an earnings upgrade opportunity’, 10 August 2021). So, with Ebitda forecast to rise by £3.5m and depreciation charges and amortisation charges only rising by £0.5m, then effectively 85 per cent of next year’s Ebitda growth should be converted into operating profit, hence why Cenkos expect operating profit to rise from £5.6m to £8.5m in 2022 and deliver 38 per cent higher EPS of 6.21p. On this basis, the shares are trading on a miserly, forward PE ratio of 10.5.
If anything, the risk to 2022 earnings estimates is skewed to the upside. That’s because Randall confirmed that the company has firepower of £20m plus through Venture’s new bank facility to make further earnings accretive acquisitions.
In my view, there has been a massive overreaction to last week’s trading update – 2022 forecasts are in line with the expectations I outlined in last week’s article – and the share price fall is not only overdone, but is likely to prove a cracking buying opportunity. I am certainly not changing my 130p target price. Buy.