ShareSoc Company Seminar - October 2018

It's been quite a gap since my last seminar, over the summer, and I've missed meeting some directors in the flesh. Fortunately this Autumnal get-together gave me the opportunity to meet "something old, something new, something with borrowings and something that investors hope will turn blue". Ahem, on with the report.

Bioventix (BVXP)

I last saw Peter Harrison, CEO of Bioventix, present 18 months ago at a Sharesoc Seminar. Needless to say the story is broadly unchanged although Peter added some additional colour tonight. It turns out that they sell just 10g of physical antibody (which dilutes down to ~5 litres) per annum and this brings in £2m of sales. The rest of their income, about £6m, comes from downstream royalty payments (where this is set at 2% of the reagent pack price). The USP for Bioventix is that their sheep monoclonal antibodies (SMAs) can advantage downstream customers and that once a customer has gone through the regulatory process they are very reluctant to repeat the process. As an example Siemens are currently rolling out their new troponin test, which is much more sensitive than existing tests, and have received US approval. While this has taken longer than expected, with sales thus coming in lower than expected, there is no doubt that this test will deliver substantial royalties in the future.

Talking about the future a characteristic of Bioventix is that they work on long timescales. The antibodies which are making money now were developed over the last decade and the ones which they're exploring now won't pay out until 2025-35 (if at all). This means that revenue is rather predictable but equally there aren't going to be earnings surprises to the upside. Right now their new amyloid test looks exciting, and important, but there's lots of science to be done first with research to revenue typically taking 5 years. There are also a bunch of other antibodies in the pipeline, ranging from high-value high-risk tests (e.g. Cardiac MyC) to low-value low-risk (e.g. contract cancer test), and I get the sense that the team is open to opportunity. An example of this is Biotin as this is both used in tests and taken as an oral supplement - the result being that a supplement user can get a false zero reading and then be incorrectly sent home! If Bioventix can add value here then that would be decent win for the company.

Still the key right now is that troponin should take off and counteract the imminent loss of sales from NT proBNP (due to expire in July 2021). This latter test is the second biggest earner and growing strongly so there's a big gap here to be filled. The highest earner is their Vitamin D test (3x the sales of NT proBNP) and again this has been growing well. Peter believes that this growth is likely to tail off but that sales should simply plateau rather than fall away. All in all I'm happy with Bioventix being one of my larger holdings on the basis of its sales profile over the next few years being relatively predictable but like every holder I'll be keeping an eye on troponin test growth.

Haynes Publishing (HYNS)

Like probably everyone else in the UK my perception of small-cap Haynes was that it's a tiny, niche publisher of manuals struggling to stay relevant in the on-line world. To some extent this is true since 50% of revenues still arise from people buying physical manuals and then tinkering with their cars. However the group has been evolving for a number of years and is no longer vertically integrated (owning their own manufacturing, distribution and logistics) in order to control every step of the process. Instead they just own all of the content and IP in their manuals and outsource production. This divestment released enough cash for Haynes to invest in their digital professional services business through acquisition and controlled organic growth. This division, which is all B2B and benefits from long-term contracts (1-7 years with an average 3 year term) now provides half of all sales and continues to grow strongly.

Usefully the presentation covered the key brands within professional services and how they leverage the vast amount of automotive data which Haynes controls. First up came parts distribution which provides workshop data to mechanics and has grown from 40,000 to 60,000 users in the last two years. Then there's the organically created diagnostic equipment arm which now has 6/10 of the largest global accounts (and it'll never be purchased by 2 of the remaining accounts as they have their own solution). Oil & lubrication, which sounded dull to me, is actually quite important in that all types of equipment can be matched to the right oil and this knowledge even extends to providing analytical support to manufacturers. Fast fit concentrates on the vehicle registration market and apparently Haynes capture 150 data points for each registration; this is quite remarkable and their data is so good that they end up correcting the DVLA! Finally in the automotive after-market they provide consultancy and niche tools which expose the unique Haynes data set.

It's clear that there has been massive transformation here over the last 5-10 years with strong cash-flow and asset sales supporting this restructuring. With a consumer digital platform just launched it feels as though Haynes is on the verge of securing a profitable future. That said analyst forecasts for the next few years point to single-digit growth and I think that there are a few reasons for this caution. Firstly earnings at Haynes have been volatile for a number of years and while a decent dividend of 7.5p has been paid for the last 5 years it's also sat unchanged for that period with low cover by earnings. Then there's the fact that while £10.1m of cash was generated last year a large chunk of this, £8.4m, went straight into development spending. While this spending level may no longer be increasing it's also unlikely to fall much as the company keeps investing in its various divisions. Finally there's a legacy pension deficit of £18.7m (pretty material when the market cap is £30m) which may reduce as discount rates change but must be sucking up contributions. So while I believe that the board of Haynes are doing everything right in securing their future I think that I'll need to see a few years of stable profits before feeling comfortable enough to invest.

Volition (VNRX)

Given that I last saw Volition just a few months ago, at the July seminar, it was a surprise to see them again so soon. Not a lot has changed over the summer but CEO, Cameron Reynolds, again gave a nice overview of the business. Essentially they're developing blood-based tests for detecting early-stage cancers. This seems like an obvious avenue to pursue since blood is taken for all sorts of reasons and early detection is positive for both patients and the healthcare system. Even so Volition are apparently the only company testing nucleosomic markers as a way forwards and, if they're right about the science and the trial results are sufficiently good, the market could be huge. Actually an ok result might be enough to boost the share price by several orders of magnitude, according to Cameron, but it's probably best not to get carried away.

A number of trials are in progress with results due over the next 12 months and a good question was raised with respect to these trials: since these tests are for early stage cancer then surely you'll have to wait years to see if a test subject does or does not develop a particular disease? The answer is that this is exactly why they are looking at colorectal cancer first because it so happens that a colonoscopy is 95% accurate in detection (but unpleasant so many people avoid the procedure). Hence Volition can run their test first and then compare their results to a later colonoscopy giving them excellent and rapid feedback. Right now the small-number trials have reported good diagnostic results and a number of much larger trials are in progress (with costs being kept down through clever partnerships). If these are successful then a colorectal test should be launched 2019-20 with revenue taking off as a result. Until then Volition have $11.9m in cash, with another $9m just raised, compared to a cash burn of $3.6m per quarter. The individual investor who provided the $9m also has warrants to put in another $15m and so, hopefully, there's enough cash around to see them through to net profit in 3 years time.

Supermarket Income REIT (SUPR)

Listed for just over a year this is a brand new name for me - which is one of the reasons why I like coming to these Sharesoc seminars. Their USP is that they buy the freeholds of prime supermarkets and rent them back to the supermarket operators on very long leases with RPI-linked, upwards-only rental agreements. The reason why they can do this is that for many years the big supermarkets engaged in sale-and leaseback arrangements to move debt off of their balance sheets. Many of these freeholds ended up with insurance companies but for technical reasons these are no longer seen as good solvency capital and the leaseholds are being sold on. In some cases companies like Tesco are simply buying back the freehold but there are enough opportunities left over for SUPR to make money. So far they have acquired 6 sites (4 Tesco, 1 Sainsbury, 1 Morrisons) in off-market deals and these have a WAULT of ~19 years - which means that their income stream is both secure and stable for almost 2 decades!

The neat thing about these sites is that each one fulfils online deliveries for the supermarket, they are top trading stores in their own right and they all have large footprints with excess car parking space. The online fulfilment point is a key one since most of the selection and packing is done at large stores because drive time is the major cost factor for supermarkets (and much of their online delivery is loss making). Hence the supermarket operators depend on these omni-channel sites and won't be walking away from them (which future proofs revenue from the property). In addition there's an opportunity for SUPR to add more value by adding solar panels and local power plants, bringing in drive-thru restaurants and generally sweating their assets. When you put this potential together with the fact that supermarket yields are unusually high at the moment, compared to other commercial properties, it's clear that the managers have done their homework in identifying this present opportunity and finding angles to make it as profitable as they can.

From an investment perspective the key attraction here is the high yield (>5%) which is both secure and likely to grow at least in-line with RPI. In the next few years the managers will be looking to raise more money and acquire more keystone stores. Right now the cost of funding is low, with bank debt cross-collateralised against properties in the portfolio, and there is a steady stream of stores coming up for sale (last year £1.25bn were sold with SUPR spending just £250m to get the best ones). When they raise funds they'll look to deploy them quickly, both with acquisitions and other site developments, so that there isn't too much drag on returns. In the long run there's a clear pay-off from the new IFRS 16 accounting regulations; as supermarket operators will be forced to put leases on their balance sheet then they'll want to buy back freeholds over time (to reduce their cost of funding). This means that the supermarkets in the portfolio will almost certainly get bought, at a premium, sometime over the next few decades. So if you're interested in producing income, while taking a long-term view on a decent capital gain, then this could be an investment for you!

The author holds Bioventix out of the shares discussed in this article.

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