Bioquell has now released its interim results for the year ending 2016.
Revenues declined when compared to the first half of last year as a £361K growth in UK revenue was more than offset by a £347K fall in US revenue, a £102K decrease in EU revenue and a £374K decline in ROW revenue. Depreciation was down £375K and other cost of sales fell by £367K which meant that gross profit grew by £280K. Sales and marketing costs were down £417K, share based payments fell by £107K and there was no goodwill impairment which cost £169K last time, but R&D and engineering costs increased by £101K and other admin costs were up £692K to give an operating profit some £180K higher. We then see a £118K of investment revenue to give a pre-tax profit £309K higher. Tax charges then increased by £44K and there was no profit from the disposal which was over £35M last time so the profit for the period came in at £331K, a £265K growth year on year on continuing operations.
When compared to the end point of last year, total assets declined by £40.2M, driven by a £40.2M reduction in cash and a £326K fall in property, plant & equipment partially offset by a £343K growth in receivables. Total liabilities declined slightly due to a £321K fall in payables to give a net tangible asset level of £16.3M, a decline of £39.8M over the past six months.
Before movements in working capital, cash profits declined by £1.5M to £1.6M. There was a cash outflow from working capital compared to an inflow last year but investment revenue increased by £93K with interest payments down £36K to give a net cash from operations of £1.3M, a decline of £3.2M year on year. The group spent £495K on property, plant and equipment, £364K on development costs and £30K on other intangible assets to give a free cash flow of £381K. The group received £642K from new share issues and spent £41.3M on spending on their own shares which meant that there was a cash outflow of £40.3M and a cash level of £7.3M at the period-end.
The overall reduction in revenue was due to lower defence sales with the bio-decontamination business growing by 8%. Life Sciences revenue increased by 6% to £8.7M; healthcare revenue grew by 14% to £2.4M but defence revenues saw a 55% decrease to £1M. The group’s strategy is focussed on increasing revenues generated from customers in the bio-decontamination business and the board expect defence revenues will decline as a proportion of total revenues.
Sterling has weakened significantly against the US dollar since the Brexit vote which has benefited the company. The gross margin was up 4% in the period reflecting the results of targeted cost-reduction programmes; price increases for certain products and a reallocation of certain costs to admin expenses.
Despite the accounting charge for R&D increasing in the period, cash costs fell by 7%. In the short to medium term, the group expect R&D costs to continue at this lower level reflecting the completion of the current product range but they are working on product line extensions to complement the existing portfolio.
During the period the group saw continuing strong demand in Asia Pacific for the purchase of equipment and significant demand for service-based contamination control solutions in Europe and the US. Overall the Asia Pacific business was strong and showed good growth; European activity levels were steady and the US had a weak Q1 with a stronger Q2.
In the period the group undertook a major restructure of the US business with a number of changes to the sales force. They have removed the generalist, externally based sales force and increased their investment in digital marketing, office-based sales people as well as the judicious use of experts. This approach as resulted in a materially lower sales-related costs and early signs are encouraging regarding increased revenues. They are now in the process of expanding this model in the US and are considering how best it can be applied elsewhere in the business.
Although the group are continuing to support their customers in the defence sector, it remains extremely difficult to forecast future defence-related orders. There continues to be demand for their specialist chemical, biological and nuclear filtration equipment from a number of customers in the Middle East.
In June the group launched a new fixed, wall-mounted HPV decontamination system which incorporates the use of their hydrogen peroxide consumable cartridges. Initial signs of market demand are encouraging and the first order comprised an order for 16 units, due for delivery in J2, for a substantial French life sciences company.
There are an increasing number of regulations affecting the markets into which the group sells and typically they have found that more onerous regulation tends to help increase demand for their technology. Two examples of regulatory changes that they believe positively affected their market position during the period are:
A new regulation in Europe based on the French national standard which comes into force this February. This requires companies selling airborne disinfection systems to pass demanding microbial inactivation tests, including the inactivation of hard to kill fungal spores. Low concentration hydrogen peroxide nebulisers struggle to pass these tests and the group expects a number of nebuliser systems will be removed from the European market when the new standard comes into force.
In February 2016 the new ISO standard 18362 came into force. This standard relates to the manufacture of cell-based healthcare products, control of microbial risks during processing. The standard specifically highlights the challenges associated with viral vectors used in the production of certain cell-based healthcare products as well as the advantages of using closed systems such as the QUBE over more common biological safety cabinets.
The board have now concluded the strategic review and believes that Bioquell shareholders interests would best be served by continuing to build a bio-decontamination business and focussing on further improving its financial performance. Accordingly the management of the business will be restructured. Ian Johnson has become executive chairman and the current CEO, Nick Adams, has stepped down. In addition, Jay LeCoque, former CEO of Celsis International has joined the board in the new role of Commercial Director and Nigel Keen has left after spending seven years as Chairman.
During the period 20,405,814 shares were repurchased under the tender offer and subsequently cancelled. The total consideration of this purchase was £41.4M with £60K charged to the income statement.
Going forward, the board is confident that the improved financial performance seen in the first half of the year will carry through to the full year and they remain on track to meet the board’s expectations for the year as a whole.
There were no dividends paid or announced during the period. Net cash stood at £7.3M at the period-end compared to £47.6M at the end of the prior year. The forward PE is currently standing at 33.9 for the full year and the dividend yield is 1.4%.
Overall then this has been a bit of a mixed period. Profits were up but the operating cash flow reduced and although some free cash was generated, this was aided by a low level of capex. The defence business is struggling with low visibility in orders and a collapse in revenues but the bio decontamination business showed some growth. It performed well in Asia but poorly in the US, although this did improve in Q2.
It seems the board failed to find a buyer for the group and I am not a big fan of the executive chairman role so not sure the board changes are positive. The group has plenty of net cash, however, a rock-solid balance sheet and is trading in line with expectations. I am tempted to enter here at the right price, but the shares look a bit expensive at the moment.
On the 19th January the group released a trading update covering the year as a whole. They estimate that revenues will be broadly in line with market expectations at about £26.8M (about the same as last year). This comprises £25.5M for the core biodecontamination business, representing growth of some 8.7% (1.3% at constant currency rates) and £1.3M for the defence business, down from £3.5M, as revenues fluctuate considerably from year to year. Pre-exceptional pre-tax profit is expected to be modestly ahead of market expectations. The group had a net cash position of £8.8M at the year-end.
This looks OK, obviously helped by forex movements, but not all that exciting.