Venture Life Profit Warning: Shares in healthcare products specialist Venture Life (LON:VLG) tumbled on a profit warning on Friday as the company revealed a slowdown in sales would impact profits for this year. Given the already lofty valuation the shares sat on, it was perhaps a surprise that the fall was not more:
As we can see from the longer-term chart, Venture Life was a massive beneficiary of the pandemic. Its share price re-rated heavily which has allowed for an equity raise, the proceeds of which were spent on acquisitions, some of which were reported on today.
Venture Life may be an unfamiliar name to some, but its products are pretty well known. Brands such as Ultradex and Dentyl are sold in pretty much all supermarkets. There was also a bumper trade in hand santising gel, as the pandemic delivered a huge demand for this product. Its most recent acquisitions see the company branch out into different areas. BBI Healthcare specialises in womens health and diabetes management, whereas its most recent acquisition Helsinn produces a range of oncology support products.
With the company having broken into profitability in 2018, and with a modest market cap at the time, this was of some interest to investors.
What did the Venture Life profit warning say?
This comes out in an RNS today. The headline is that expected revenues for the half year are £13.8m – down on expectations of around £17m. At least the culprits are clear: the first being hand sanitising gel (HSG):
HSG delivered revenues of only £0.1 million in the first half (2020: £3.2 million), significantly lower than in 2020 as there remains significant levels of stock in the channel. There was panic buying in Q2 2020 and what now appears to be significant overstocking, which has not yet sold out through retailers. Whilst we had expected HSG sales to be materially lower in 2021 than in 2020, actual trading so far is lower than our expectations due to significant stock still being in the channel. This was an opportunistic, yet meaningful revenue stream for us in 2020, and we do expect some continuing contribution from HSG. However, the data in recent months indicates that it is unlikely to be anywhere near the 2020 levels in the future.
This is clearly a massive fall, and probably not just due to overstocking – this gel is now very common everywhere and even if there was a shortage there can be homemade substitutes.
Of more concern was the issue of Dentyl sales in China:
In addition, whilst we have also seen some sales to our partner for Dentyl in China during the first half of 2021 (£0.2 million vs £2.3 million in H1 2020) as well as the continued paying down of a significant part of their debtor balance, sales out to this partner so far this year have not picked up as we had expected. The partner is still suffering from the effects of the Covid impact in 2020, and is not yet taking new product at the rate anticipated when the agreement with them was signed in 2020 or indeed in line with their communication earlier in 2021, which has likely been exacerbated by the significantly increased shipping cost to China now being seen. Whilst we expect more sales to this partner in 2021, and are hopeful that sales this year can at least match the full year 2020 revenues to this partner, we are exploring all options to maximise the value of these assets in China, where demand for the product has been good historically.
Mouthwash seems a little different from hand sanitiser, and demand should be fairly constant for these type of products. Whilst the pandemic is making us wash our hands more, we don’t clean our teeth any more. The point about shipping costs is also relevant.
Venture Life: The Business
A quick look at the basic scorecard reveals that this is a changing business, and the pace of change has been even quicker since the acquisitions:
Not all of this growth has been organic and there has been several acquisitions along the way. This has been paid for by the issue of shares: there are now over 125m shares in issue, around 4 times what it was in 2016. The last raising was at the end of 2020 and was the biggest: raising £36m. However, the good news for the company was that this came at a relatively high price of 90p. However, a sore point was that the directors chose this point to unload several million pounds of their own personal holdings: never really a good sign.
The raised money also disappeared almost straight away, as £36m was the headline price for BBI Healthcare, and another c.£5m was spent on Helsinn. This has been the history of the company: to acquire other companies. The difference is the BBI acquisition was on a much different scale than what was seen before. As we can see from the financial figures, this has worked so far and the business has swung into profit.
In a balance sheet sense, the recent acquisitions has wiped out the cash balance. In fact, the recent trading update makes reference to a new revolving credit facility of up to £50m, of which £4m has been drawn down. This is a rather large sum of money relative the company and some has been marked for more acquisitions.
Unlike many small healthcare companies, there is a split of revenues across the world. Although the UK is the largest market, this is quickly followed by Italy, then a gap down to Swizterland, Germany and the Netherlands. China was also a significant source of revenues, until today’s warning.
Some unsavoury aspects to note is that the company capitalises development costs as intangible assets. This has the effect of boosting profits as these costs are not expensed and instead held on the balance sheet and amortised at a lower rate. Some £739k was added in the last year, so a significant amount relative to profit.
Another aspect is that inventory has been piling up here – that isn’t ideal when the RNS is talking about oversupply. Some 110 days of inventory sits on the balance sheet: that’s around double the time of a similar UK producer (Creightons). Another note is that both trade receiveables and payables are also about twice as long – it takes a long time to both receive and collect money.
Is the Venture Life profit warning a buying opportunity?
This is not straightforward as the company is in the middle of change. The recent acquisitions between them may add another £15m per year of revenues to the total – that’s the majority of 2019 revenues. However, two research notes came out: Cenkos predict 2021 revenues at £35.9m with PBT at £4.4m, Singer go slightly less with revenues at £35.5m and adjusted PBT at £5.5m – this may equate to a similar figure as amortisation of intangibles is large. Both forecast growth and cash generation, with more acquisitions in the pipeline.
There is a potentially game-changing development in that one of its mouthwash products may have ‘unique’ properties in killing the Covid-19 virus. The upside to that may be difficult to quantify.
The bear points surrounding the update are pretty simple: a very bad collapse in the hand sanitising gel raises questions about the inventory. Will there be write-downs? The China situation also seems quite balanced. They could come and put in a massive order; given the lack of IP rights it may be likely that copies of Dentyl are already out there.
Comparing the current price with previous prices is misleading owing to the massively different share count. At £90m+ this may seem pretty reasonable for a growth company. However, to me there are many question marks on whether Venture Life can execute things properly; as such I would consider the downside risks as a bit higher than the upside. 2/5.