Venture Life Group: (VLG.L, AIM All-Share: Market Cap ¬£51m, 57p, 2.0% of JIC Portfolio and 0.0 of JIC Top 10)
A stock for all seasons?
New Holding. 2.0% position added. I paid 56.63p for 15,000 shares. It is difficult to deal in. Patience required!
It is off 7.5% today and 15.0% from last week’s high.¬†
Conclusion: I can‚Äôt disagree with Simon Thompson‚Äôs price target of 75p and think if anything it may be too conservative. It is benefiting from big earnings upgrades and with increased sales of hand sanitiser, there may be more to come. Stockopedia ranks it on Quality grounds at 77.¬†¬†Management, who are big shareholders in the business having founded it back in 2010, (CEO Randall owns 5.0%) seem to be doing an excellent job buying brands and developing distribution channels. Dentyl is clearly a popular product in Greater China. Earnings should be defensive in a COVID and Post COVID world with a demand for consumable healthcare products likely to grow. The shares have drifted back over the last week, giving what looks like a reasonable entry point. In short, the valuation looks very attractive for what should be a good short, medium and long-term growth story. The balance sheet is strong. It feels to me like a ‚Äústock for all seasons‚ÄĚ. I‚Äôm settling for Medium Risk/High Return, pointing to a 4.0% position but to will start my position today at 2.0%.¬†¬†It is very narrowly traded and tends to move on little volume.¬†
What it does: From its website:¬†www.venture-life.com
Venture Life develops, manufactures and distributes products for the self-care market. These are non-drug products that consumers buy without a prescription to help lead a healthier life.
There is a growing demand for self-care products due to an ageing population. People are living longer and taking more interest and responsibility for their health, with an increased focus on preventative wellness. This approach of increased personal responsibility can deliver improved health and well-being in the short, medium and long term for individuals.
Based on a vertically integrated approach, we either acquire or develop in-house self-care products, that are manufactured in our factory; these are then distributed either directly to retail outlets or through global distribution partnerships.
‚ÄúWe want to become a leading global self-care branded products business. With our own expertise in development, manufacturing and international distribution, growth will come from the following:¬†Revenue growth from existing and new distribution partners; revenue growth from developing innovative products; revenue growth from product acquisition and profit growth through improving margins.
Venture Life has its own portfolio of self-care products, which are sold without prescription through pharmacies and other retailers. They address a wide range of healthcare issues from oral healthcare, women‚Äôs intimate health, neurology, cardiovascular and dermatology.
Many of our products have intellectual property including trademarks, patents clinical evidence proving efficacy as well as formulation and manufacturing expertise. Being a non-drug company means faster regulatory routes to market and lower regulatory costs.
Products include Dentyl, UltraDex, Myco Clear and Proct-eze.
It has over 100 partners worldwide, distributing in 44 markets.
In the UK it sells direct through the likes of Boots, Tesco and Amazon. Overseas it employs a B2B model with reputable pharmaceutical or healthcare partners. A list of partners can be found on the website.
Why am I buying now?
I met the company a few years ago and whilst impressed with management felt it was too early stage for me. It was unprofitable at that stage. It is now making profits and the valuation looks attractive.
Valuation:¬†On current forecast for the year ending December 2020 the shares are valued at 15.1x earnings. That looks super value for earnings growth of near 100% from 2.18p to 4.05p. Next year earnings are forecast to be flat. That seems far too pessimistic to me. Forecasts have been upgraded over the last few months; In December, forecasts for 2020 were for 3.24p, they are now 4.05p, (according to Stockopedia and Sharescope)
Forecasts have been increased due to a trading update in December in which it said, ‚Äúthe Company already has an overall order book in hand for the first quarter of 2020 that is more than ‚ā¨1 million (and more than 40%) ahead of the same time last year.‚ÄĚ It also announced¬†the earnings accretive acquisition of PharmaSource at the same time.
The announcement on 27th¬†April of a new and exclusive long-term agreement with its existing Chinese partner also led to further earnings upgrades. The agreement has minimum purchase obligations of ‚ā¨168m over 15 years of Dentyl products for distribution in Greater China.
Balance sheet:¬†At 31st¬†December it had cash of ¬£10.7m.
Share register: A nice list with management having plenty of ‚Äúskin in the game‚ÄĚ.¬†CEO and founder, Jerry Randall owns 4.7%. Other directors, Gianluca Braguti owns 8.5%, and Dr Michael Flynn, 3.3%. Outside shareholders include JO Hambro Capital Management, BGF Investment Management, Gresham House Asset Management, Ennismore Fund Management, River & Mercantile, Cavendish, Otus and Quilter.
COVID update and opportunity from hand sanitiser:¬†As the business was considered essential all of its operations in the UK, Italy and the Netherlands continued operating. In Northern Italy, its plant is manufacturing hand sanitiser which it is supplying free of charge to local hospitals. It says,¬†‚ÄúWhilst before the outbreak this was not a significant product for the Group, there are now very high levels of demand for this product from retail customers, which the Group is endeavouring to satisfy.‚ÄĚ¬†It seems to me that we will be using hand sanitiser in greater amounts as we start to venture out from lockdown.
At the results in April, Jerry Randall CEO said: ‚ÄúWith a deep long-term order book that continues to grow even now, and significant resumption of orders from China, we have had an excellent start to 2020. We have an exceptional team at Venture Life, and I congratulate them all on a good 2019, but furthermore, on a promising start to 2020 despite current circumstances. Whilst the full global impact of Covid-19 is not known, the Group is very well positioned to withstand the situation. We have a strong balance sheet, dedicated and hard-working employees, a robust order book and significant inventory position, which gives the Board confidence for the year ahead in these difficult circumstances.”
Simon Thompson in the Investors Chronicle¬†has been keen and on 4th¬†May said: Analysts at Cenkos Securities estimate that the single agreement has a net present value of ¬£21m (15p a share) based on a maintained gross margin of 40 per cent, additional operating costs being borne by the Chinese partner, and after applying a discount rate of 12.4 per cent to the cash flows generated. That‚Äôs a material sum in relation to the ¬£4.2m Venture paid for the Dentyl brand in 2018 and the company‚Äôs market capitalisation of ¬£52m. It also means that Venture will start each year with a contracted order book of ¬£10m from this agreement alone.
He goes on ‚ÄúThere are not many companies that could double profits in 2020, but Venture is one of them. Even before the latest contract win, the order book was 2.5 times higher than at the same stage last year, and that excludes a contribution from the acquisition of PharmaSource, a distributor of a range of medical device products (fungal nail infections, wart removal and women’s health). To put Venture‚Äôs top-line growth into perspective, Cenkos expects 2020 revenues to increase by a quarter to ¬£25.3m. So, with gross margins being maintained on a relatively fixed cost base, earnings per share (EPS) should almost double to 4.3p as operational leverage kicks in.‚ÄĚ
Simon sets a price target of 75p based on cash adjusted 2020 forward PE ratio of 12.5x.