Optibiotix - interims do not impress but it really is a strong buy argues Tom Winnifrith

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Shares in Optibiotix (OPTI) have fallen by more than a quarter on the back on results for the six months to May 31 which are, let us not kid ourselves, really not very impressive indeed. The bears are cock-a-hoop but now talking errant nonsense. We bulls look a bit daft. As a shareholder I feel a bit sore but, having chatted to CEO Steve O’Hara at length, I retain a stance of strong buy. I see one director, Fred Narbel, has bought 17,000 shares at 50p and I expect more, larger scale, boardroom buying to follow. And this is why...

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Sales came in at £148,818. That is well up on the £80,000 in H1 2018 but way down on the £434,000 in H2 2018 and that is one matter the bears focus on. The loss was £1.26 million and with period end cash of £984,000 the bears immediately scream placing ahoy. Again they are just totally wrong as I will explain. So why are sales down? Well most of the royalty deals are annual and they, as well as a material six figure milestone payment, fall due in H2. Most of the royalty deals that came in in H2 2018 are now in year 2 so will have an automatic ratchet up. O’Hara is now almost three months into that second half so has some sense of revenue visibility and says he is targeting an H2 uplift in 2019 of a similar scale to that in 2018, 5 or 6 times. He is confident therefore that full year sales will be in the region of £1 million, most of it on a very high gross margin (royalties and milestones being near as damn it 100%).

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The loss recorded in H1 is after both the Optibiotix equity accounting share on Skinbiotherapeutics (SBTX) losses and a raft of non cash items (amortisation, share based payments, etc). The key number is cashburn which was £440,000. Cash plus tax credits due at the period end were £1.26 million and Optibiotix has generated another £250,000 since by selling some shares in Skinbiotherapeutics. That cash is earmarked for a small acquisition but that may or may not go ahead. In other words even if H2 was as bad as H1 Optibiotix has enough cash to last until November 2020 but IF it meets O’Hara’s second half forecast it will actually generate cash in the second half. The underlying cash costs remain at c£100,000 a month and O’Hara forecasts that this year the company will generate gross profits of almost that much with a material uplift next year. Optibiotix has now concluded 44 manufacture, supply and distribution agreements. As time goes on more and more of these are starting to kick in, slowly at first but they will grow in scale and on very high margins. Also, buried in the statement is a reference to a deal with a retailer to sell a range of Optibiotix products. I am told there are actually two retailers in the UK where terms have been agreed but verification of various matters is needed. The belief is that at least one of these will have concluded this financial year ahead of launches in 2020. O’Hara discussed this in detail with me some weeks ago HERE. How big could these deals be?

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One retailer = sales to Optibiotix of £3.5-5 million a year. Two equals £7 million. The margin here would be 20% but even so that would be a gross contribution of £700,000 - £1.4 million per annum plus massively increased brand awareness which would help Optibiotix’s rapidly growing own online sales (where margins are c85%) which in H1 ran at £11,000 pcm but which are growing rapidly. So what does this all mean for forecasts? This year let's look for breakeven. Next year with one retailer on board and using a middle of the range sales number it would chip in £4.25 million sales and a GP of £850,000. The rest of the business should deliver sales of £3 million and a GP of £2.1 million. And that leaves the business making a cash profit of c£2 million. The year after with two retailers on board we might look for £7 million retail (GP £1.4 million) and £5 million non retail (GP £3.5 million) which is a PTP of c£4 million. The year after that O’Hara insists that £7-10 million PTP is still very much achievable. At the current mid, the market cap is just £42 million. Knock off the value of the remaining stake in Skinbiotherapeutics (c. £5.5 million) and Optibiotix is being valued on a, in 3 months time, current year PE of 19 falling to 9.5 falling to 5.5 which is far too low for a company with no financing issues and such an exciting growth story. For we shareholders this is not a happy time but it is not a time to panic but one to follow the board and add to your holdings. Strong buy.

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Filed under: Optibiotix, Burford, Guernsey Financial Services Commission, Sam Hutchins, Woodford

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