Collagen Solutions Plc LON:COS reports on a year of change with significant progress being made towards its short term goals of cash flow break-even. The acquisition of SLB is delivering on its strategic intent. Evidence of cross selling products and services exists with sales approaching £1m. With clear evidence of meaningful gross margins (78%) and new customer wins, the anticipated higher sales volumes should begin to offset the c. £1.5m central overhead with cash flow break-even anticipated in H2 2015/16. These margins, in turn, are expected to drive long term shareholder value.
Full year results: Included 3½ months contribution from SLB acquisition. Sales were £0.98m, up from £24k. Group revenue, including grant income of £60k, was £1.035m. A LBITDA of £0.726m was recorded (£0.689m if include grant income). Exceptional costs of £0.155m, relating to the acquisition and integration of SLB are excluded. Net cash at year end was £3.3m, comprising free cash outflow of £1.37m, acquisition costs (net of acquired cash) of £2.226m and £5.4m from the share placing in December 2014.
Strategic outlook: The combination of three businesses over the past 18 months has created the bedrock from which to build out the business. There is a customer base generating recurring revenues, a surety of supply of high grade collagen and the evidence that global medical device manufacturers want to work with COS, evidenced by the four disclosed supply agreements announced over the past 12 months.
Valuation: With no change to forecasts but rolling on one year, our DCF valuation rises to £73m or 39p per share (32p) – forecast cash-flows to 2018, projected cash-flows thereafter to 2021 and a 2% terminal growth rate. As visibility to contracts improves so too are forecasts likely to be underpinned/rise, with the full value of the technology platforms increasingly being reflected in the share price.
Risks: The integration of SLB appears to be well in hand. The single biggest risk remains the exact timing of development and manufacturing contracts and supply agreements, although recurring revenues do exist. Regulatory delays for client products and potential competition from alternate bio-materials remain risks.
Investment summary: Collagen Solutions plc’s board stated objective is to create a business worth c.£100m by 2020. To achieve this, the Company will have to win further developmental contracts. Equally management are expected to source additional technologies and businesses to build critical mass and exploit the opportunities in the field of bio-materials.
You can download the full Hardman & Co report on Collagen Solutions plc here: Collagen Solutions – FY 2015 results_July 2015 final
