Shares in Benchmark Holdings (LON:BMK) declined by as much as 30% today as a trading update for the third quarter revealed challenging conditions in the market which have reduced sales. The price has dipped, but seems to have found an element of resistance:
The bigger picture is that this share is close to an all-time low in terms of price, although it has been diluted heavily along the way. The trend has been broadly downward for a while although recoveries and declines have been sharp: this is a classic ‘jam tomorrow’ share, as most recent years have seen losses, with the prediction of big profits around the corner.
This can be understood with what the firm does, and Benchmark specialises in ‘aquaculture’. Founded by current CEO Malcolm Pye, it produces a range of health and nutrition products for marine life which can boost the efficiency and yield for food as well as improve sustainability. The biggest contributors to revenue are its Advanced Nutrition and Genetics divisions.
We can see that this may be quite exciting for investors. The need for sustainability and efficiency in farming operations will always be in demand, and this niche potentially can be very lucrative for Benchmark as its solutions become patented, offering a very high barrier to entry. We haven’t quite got there yet, but profit projections by brokers (available on Research Tree) look strong in a couple of years.
Todays warning is a reminder that things can be turbulent in the meantime.
The warning comes in a Q3 Trading Update RNS. It is worth noting that the last update was not so long ago (25 Jun). Since then, the CFO has stepped down.
The Company has continued to face challenging conditions in the global shrimp and Mediterranean seabass/bream markets, as outlined in its half year results in June 2019, which has impacted sales volumes in Advanced Nutrition. Additionally, the Company is experiencing a reduced contribution from trials of certain pre-license pipeline products within Animal Health, as a result of making good progress towards satisfactorily concluding trials with fewer treatments than expected, and from delays in commencing trials in several territories.
Advanced Nutrition contributes approximately half of total revenues so this is likely to be significant. We continue on:
The Company’s expectations of the revenue and profit mix for the full year have also changed. The Company is actively progressing its programme of operational and structural efficiencies, including key commercial licensing deals for its non-core animal vaccines, which, if completed this financial year, are expected to substantially offset the negative variance referred to above. However, there is a risk to the delivery of these deals within the current financial year.
The latest broker note revised revenue downward (from £173m to £164m) as well as adjusted EBITDA from £22.1m to £19.5m. This latest update seems to imply that these may be revised downwards again, so efficiencies gained would need to be large.
One thing that cannot be denied is that sales have risen quickly at Benchmark. Anticipated revenues for this year were £163m, which is up from £35.4m five years ago, which is a huge growth rate by anyone’s standards. I would guess most people would not have the means to assess the quality of Benchmark’s products, but it is clear to see that they have a market for it.
But this is not the only thing that has increased. Debt has increased steadily, and now stands at a projected £65.5m. The main reason for this is capital expenditures of which there has been plenty:
Over this time period, there has been over £100m spent in this way – researching and developing new products is not cheap. Added this to the continual operating losses mean there has been a large demand for cash. In part, this has been financed by debt and equity raises which has allowed it to continue and also acquire INVE Aquaculture holding, to bring us to where we are today.
The projection for debt increases to a maximum of £80m in 2020, which leaves us sailing a little close to the wind. It seems that its facility has been recently refinanced and gives a total of USD 110m. Crucially there are no leverage requirements, but instead a minimum liquidity requirement and equity to assets ratio. However, this does not come cheap: interest payments will be costing the best part of £5m a year.
Speaking of assets, this measure is heavily positive overall, with £553m of total assets and approximately £324m of goodwill and intangibles. Net Tangible Asset value is still positive to the tune of almost £50m.
On the flip-side all these expenses are going towards something quite promising: the pipeline of potential products now numbers 23, some of which are coming to market imminently and are very large. Products for shrimp and sea lice on their own could net annual sales of £100m on their own. 2021 is the year where this operational leverage pays off, with real operating profits of £17m and going beyond this, we could see this go further as additional products come online.
An interesting company and easy to see why it may be exciting for investors. Without expertise it may be difficult to really evaluate the quality of products, or the nature of competition. We have seen from other companies in the pharma sector that cut-price alternatives can really affect the share price, as the cheaper product kills pricing power almost indefinitely.
It is fair to say that spending has been heavy, and there may not be much headroom left, meaning that these projects have to come to fruition soon and delays of another year may not be tolerable. The operating efficiencies the company has up its sleeve remain unknown. It is clear that clearly a lot of money could be saved by simply turning off the capex taps (which could instantly turn its fortunes) but whether this is possible or even beneficial remains to be seen. With so much invested in pipeline products, finishing them may be the only way forward.
The bull case is that demand for sea life as food seems almost certain to increase, with a growing population in terms of number but also spending power. Getting in now may be acceptable if things turn out as planned.
However, with profit warnings such as this happening before, I would think that the road ahead would be quite bumpy and too complex to forecast. 2/5.