Companies often describe deals as “transformational” without any real justification. But one by Yourgene (YGEN) really is a game changer and is fantastic news for we loyal shareholders. The big reason NOT to buy the shares until now was that the company owed Life Technologies ( a subsidiary of Thermo Fisher) c£15 million of debt and accrued interest. It had racked that up fighting the Illumina patent challenge. Life has agreed to exercise 41.3 million warrants at 9.2p to realise £3.8 million which will be used to repay part of that debt. The rest (£12.7 million) has been written off. Life will be locked in for three years and now owns 9% of Yourgene. It retains 54 million warrants with a strike of 16.6p which Yourgene can force it to exercise if the share price stays above 24.9p for a set period. That would leave Life as a 17% shareholder. The net result is that Yourgene is now essentially debt free...
As part of the deal Life has been given a three year exclusive deal to flog Premaitha’s products in South East Asia which will only serve to accelerate sales growth. Once Yourgene is cashflow positive it will have to pay a commission on those sales capped at £6.5 million. Bring on the sales that is all upside. What we are also told is that trading is going really well: “Trading in the second half of the current financial year is anticipated to be the strongest period to date and we will enter the new financial year effectively debt free, with no distractions from litigation and with a strengthened leadership team that is aligned to deliver a platform agnostic business both within NIPT and the wider genetic testing market. We have a strong pipeline of new product opportunities that will broaden our offering, making Yourgene even more relevant to our global partners." Aha you want hard numbers on that?
The company will report a loss in H2 ( the six months to 31 March 2019) but a sharply reduced one. House broker FinnCrap had been forecasting sales of just under £12 million and an EBITDA (which now equates very closely to free operating cashflow) of £600,000 for next year (i.e. the year starting in just a few weeks time). But my conversations suggest those numbers are way too low. The nature of Yourgene supply deals is that they are multi year. So H2 sales will reflect a full six months of those deals in operation in H1 plus part period sales of new deals signed. As you move into the next financial year the process repeats and is bolstered by yet more agreements. And thus I would be looking for sales in the year to March 31 2020 (the current year in just over six weeks) to be c£15 million with an EBITDA of c£2 million. For the year that follows I am looking for £20-22 million sales and EBITDA of £5 million plus. At a 14p offer the market cap is c£63 million, which puts the shares on a multiple of 31 times ( soon to be) current year falling to 12.5 times falling to (perhaps) 7. That looks pretty undemanding for a growth play. As such you can very easily justify a price target of 25p+ but we are cautious souls and so will adjust our target to account for the new shares but this is now a very de-risked proposition. At up to 15p STRONG BUY with a target to sell of 20p (short term) more if you show greater patience.
PS paid for researcher Hardman has put out a note on Yourgene although Yourgene does not actually pay and it seems as if Hardman has not spoken to the company. As such it asserts that Yourgene needs more capital (which the company denies as it is now profitable), and has forecasts which are just plain wrong. Even so it values the company at anywhere between today's share price and double today's share price! I understand that Yourgene is hopping mad with the Thirsty Paul Scott of the paid for research world and will be demanding and getting a corrected note. Ceteris patribus, if forecasts are upped and the balance sheet "misunderstanding" dealt with the target price would have to be increased.
Filed under: Yourgene, Bearcast, Haydale, Lloyds, McBride, Nigel Somerville, Gooch & Housego
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