Sygnis — Update 19 May 2016

Sygnis — Update 19 May 2016

Sygnis

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Sygnis

Electrifying sales potential

FY15, acquisition and funding

Healthcare equipment & services

19 May 2016

Price

€1.38

Market cap

€23m

€1.26/£

Cash (€m) at 31 March 2016

3.4

Shares in issue
(31 March 2016)

16.5m

Free float

56%

Code

LIO1

Primary exchange

Frankfurt

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(21.0)

(21.0)

(57.8)

Rel (local)

(19.6)

(24.8)

(50.8)

52-week high/low

€3.79

€1.42

Business description

Sygnis develops polymerases for the amplification and sequencing of DNA. It launched a directly sold via web range of products in 2015, with more products due in 2016. It also uses distributors. Sygnis plans to acquire Expedeon, a proteomics business with direct sales capability.

Next events

AGM

20 June 2016

Analysts

Dr John Savin MBA

+44 (0)20 3077 5735

Lala Gregorek

+44 (0)20 3681 2527

Sygnis is a research client of Edison Investment Research Limited

Sygnis intends to acquire a private UK proteomics company, Expedeon, funded by issuing up to 20.5m shares. Sygnis produces innovative molecular biology kits, while Expedeon makes well designed but standard consumable products for protein analysis. Expedeon has a UK- and US-focused, 13-person sales and marketing team and a five-year sales CAGR of about 20%. The deal will complete in mid-year and integration and training will take some months. Sygnis expects to see sales synergies from 2017 and might achieve profitability if sales grow to about €7m with well-controlled costs. Sygnis had Q116 sales of €0.1m and cash of €3.4m.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

0.39

(1.92)

(19.27)

0.0

N/A

N/A

12/15

0.56

(2.62)

(19.31)

0.0

N/A

N/A

12/16e

3.18

(1.01)

(3.78)

0.0

N/A

N/A

12/17e

6.90

0.13

0.36

0.0

3.8

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. The forecasts assume the acquisition is complete by end June 2016. The number of shares therefore rises to 37.05m.

Expedeon financials and deal structure

The purchase price for Expedeon appears to be about €24m (£19m), about 7x its 2016e sales of €3.5m as guided by Sygnis, up from €2.5m in 2015. Sales of €1.7m might be consolidated in the H216 results. Expedeon’s EBITDA margin in 2015 is stated to be 13%, or about €325k, suggesting a purchase price of about 70x 2015 EBITDA. The margin may increase to 15% in 2016. Sygnis intends to issue up to 20.5m shares (including a rights offering to raise €5m cash) to fund the acquisition. Only 7% of the acquisition price will be paid in cash, with the rest paid in equity under a 12-month lock-up.

Sygnis 2015 and Q1 results, and acquisition

Sygnis reported €550k in sales in 2015, below our expectation of €650k, partly due to lower caco cell royalties of €252k (2014: €300k). Web kit sales were €148k with €155k from Qiagen in SensiPhi royalties. The reported 2015 net loss was €4m with cash outflow of €4.4m before funding; this includes €0.7m of restructuring costs. Sygnis adjusted its 2016 pre-merger sales guidance to €1.5m from €2.5m. Revenues in Q116 rose 20% to €91k. Cash outflow in Q116 (including capex and R&D expenses) was €1.2m, leaving cash of €3.4m at 31 March.

Valuation: A big deal for a small company

Sygnis expects 2016 consolidated revenues to be around €3.2m (€5m annualised), with the loss reducing to about €1.0m. After issuing about 20.5m new shares to fund the acquisition, there will be up to 37m shares in issue, from 16.53m currently. At the current price of €1.38, the new group could have a combined value of €51m, about 10x annualised combined 2016e sales of €5m. The payoff is from 2017 when sales synergies, growth and cost control could enable profitability. Expedeon has a strong OEM sales channel with Sigma, a leading reagent distributor. A Chinese deal signed by Expedeon with Tanon in 2015 could add $1m sales in 2016. These deals might offer further opportunities for Sygnis’s molecular biology products.

Adding sales people and volume

The Expedeon deal in strategic terms is excellent for Sygnis. The impact on Sygnis’s combined sales line will be dramatic as it broadens the product range and adds direct sales. This gives the possibility of profitability from 2017, assuming that the molecular biology kits become better established and that costs are controlled. Expedeon has seen a revenue CAGR of about 20% over the last five years and needed access to capital to maintain its growth. The businesses are complementary, with Sygnis operating in innovative molecular biology kits and Expedeon in convenience commodity markets for protein analysis (proteomics), with cleverly designed but standard products based around a core range of electrophoresis products. Synergies are expected from 2017, but the impact in 2016 will be limited as the deal will not complete until mid-year and integration and training will take some months. The deal requires AGM approval on 20 June 2016.

Expedeon business

Expedeon Holdings reported a 2014 loss of £70k (after amortisation of £73k) and noted a historic value of £174k (€219k) for Expedeon, the trading subsidiary. Note that as a small UK company, Expedeon does not disclose full accounts so this is based on abbreviated balance sheet information. The last public accounts were dated 31 December 2014.

Expedeon was loss making until 2012 when it started to make profits and generated cash. It recorded a statutory 2014 profit of £131k (€165k). Cash in 2014 (so nearly 18 months out of date) was £173k with investments of £26k. In 2014, Expedeon made a 2014 capital investment of £357k, so cash generation was clearly strong; amortisation and depreciation were £17k, so not material.

In 2015, Expedeon sales were stated by Sygnis as €2.5m (£1.98m) with an EBITDA margin of 13%: €325k (£257k). 2016 expected sales are stated by Sygnis to be €3.5m; this would be 40% revenue growth, above the CAGR range of 20%. The higher expected growth is probably due to the Chinese deal with Tanon (signed with Expedeon in 2015) promising to add $1m to sales in 2016. The EBITDA margin is expected to rise to15% in 2016, according to Sygnis.

Business synergies

Sygnis’s core IP is a range of novel engineered enzymes for genetic analysis and genome sequencing. The two own brands are TruePrime and SunScript. TruePrime kits copy and amplify the whole genome before DNA analysis and gene sequencing. Sygnis has shown data on the advantages of avoiding random primers by using the TruePrime system. This gives better-quality genomic DNA with much less contamination from extraneous DNA sources. The SunScript kit converts short-lived RNA messages in cells into DNA for analysis or sequencing. The enzyme is stable with high yields and sensitivity claimed; it can work together with TruePrime. A planned Q3 2016 launch is for a cell-free DNA kit for liquid biopsy for research use. Sales are mainly through distributors, but with web sales building slowly over 2015. The deal with Qiagen on SensiPhi has been disappointing and is non-exclusive from 2016. This will allow Sygnis to develop its own products based on this novel enzyme.

Expedeon’s core sales seem to be a range of convenience electrophoresis products. The products offer good value through innovative features and are not discounted. These techniques have been used in biochemistry laboratories for decades to analyse mixtures of proteins and to get basic data like molecular weight. The method separates proteins using a high-voltage electric field to pass them through a gel. Researchers can pour their own gels, the traditional route, but precast gels are easier, safer (toxic chemicals), stronger (Expedeon offers a tear-proof gel) and give consistent results. Gels are stained with traditional coomassie, a blue dye also sold by Expedeon as Bradford reagent, or by luminescence, a more sensitive technique offered by several suppliers. Expedeon also sells other reagents for extracting and analysing proteins and some bench-top equipment. No sales breakdown by category is available, but we presume that precast gels are a steady volume seller with regular repeat orders. The many other products probably form a long tail, as is normal in reagent businesses. Expedeon’s marketing channels are shown in Exhibit 1. There are nine identified sales territories, with the emphasis on the UK home market and the US with almost two-thirds of sales, plus a presence in Germany, France and Singapore. There are 13 sales and marketing staff in total. Manufacturing is done in the UK and US.

Exhibit 1: Expedeon sales strategy

Source: Sygnis

The two product lines do not overlap and fit together well as shown in Exhibit 2.

Exhibit 2: Complementary product lines

Source: Sygnis

The two types of product lines are often used by different types of researchers, although there may be a lot of overlap depending on the project. However, they will often be in the same research facility so it should be easy to add in extra sales calls and boost the sales per call as a result.

Deal: Terms and placing

Sygnis plans to pay €1.7m in cash for 7% of the Expedeon equity with the balance paid in equity: a total price of €24m (£19m). Given the Expedeon 2016 sales guidance of €3.5m (£2.8m), this is a sales multiple of 6.7 times. If the EBITDA margin in 2016 is 13%: €460k (£360k), this is an EBITDA multiple of about 46 times. Sygnis plans a rights issue to issue up to 20.5m shares. Of this, €5m is expected to be for cash with €1.7m allocated to pay 7% of the acquisition cost. The rest of the cash covers fees, legal costs and working capital; we expect up to €1.5m in deal costs and at least €1.8m for working capital. If the cash portion of the rights issue in undersubscribed, the difference in the purchase price will be paid in shares. The lock-up on Expedeon shares is 18 months.

Sensitivities

In terms of the combined business, these are two different sets of expertise so integrating the operations might not be straightforward. Some Expedeon sales people may be less familiar with the relatively complex, technical and fast-moving molecular biology area with multiple competing products. Electrophoresis technology is long established. However, once initial training has been done, the deal should deliver good synergies. These will be seen in 2017. The long lock-up period of 18 months should delay any share overhang effect on the share price until late 2017. This lock-up also extends to major Sygnis shareholders (owning more than 3%).

Valuation

We have reduced our pre-merger 2016 forecasts following the revised guidance given with the FY15 results. Pre-merger, the revised expected operational loss was about €1.8m. Post-merger, this might reduce to no more than -€1.6m, Exhibit 3. The combined business could have consolidated 2016 revenues of around €3.2m, Exhibit 3. Expedeon might contribute over €228k EBITDA (at a 13% margin) in 2016 (half year) and about €630k in 2017 (full year). We assume that Expedeon brings €500k in cash.

Exhibit 3: Highlights for 2016 comparing pre- and post-acquisition operational forecasts

2016 (€000s)

Sygnis pre-merger

Expedeon

Merged

Revenues

1,425.0

1,750.0

3,175.0

CoG

(69.3)

(402.5)

(471.8)

Operational costs

(3,195.0)

(1,085.0)

(4,280.0)

Operating loss

(1,839.3)

262.5

(1,576.8)

Source: Edison Investment Research

After issuing 20.5m new shares to fund the acquisition, there will be about 37m shares in issue, up from 16.53m at the end of March. At the current share price of €1.38, the new group could have a value of €51m, which would be about a tenfold multiple on annualised combined sales guided for 2016 of €5m. The payoff is from 2017 when sales synergies should be in place, direct sales of molecular biology kits could have risen and costs might have been rationalised, which might take the merged business to profitability.

Financials

Financial forecasts assuming the merger completes by 1 July 2016 are in Exhibit 4. Sygnis’s 2015 sales were slightly lower than we expected at €555k (€650k forecast) due to a decline from €300k to €252k in caco cell royalties from LION Bioscience and lower royalties from Qiagen at €155k. Q1 2016 sales were €91k. Cash flow (including R&D and capex) was -€4.4m with -€1.2m in Q1. A capital raise of €6m in December 2015 yielded €5.1m net, giving 2015 year-end cash of €4.6m and Q1 cash of €3.4m. Sygnis had €0.7m of extra costs associated with rationalisation of the business during 2015. These have reduced overall costs. The interest charge has reduced from 2016 as the expensive loans have been repaid and the remaining debt is a soft loan at less than 2% interest.

Exhibit 4: Financial summary

€'000s

2014

2015

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

392

555

3,175

6,900

Cost of Sales

0

0

0

0

Gross Profit

392

555

3,175

6,900

EBITDA

(1,724)

(2,394)

(932)

209

Operating Profit (before GW and except.)

(1,781)

(2,445)

(983)

158

Intangible Amortisation

(524)

(329)

(344)

(344)

Exceptionals

(283)

(828)

0

0

Other

(620)

(260)

(250)

(250)

Operating Profit

(3,208)

(3,862)

(1,577)

(436)

Net Interest

(137)

(177)

(30)

(26)

Profit Before Tax (norm)

(1,918)

(2,622)

(1,013)

132

Profit Before Tax (FRS 3)

(3,345)

(4,040)

(1,607)

132

Tax

(135)

29

0

0

Profit After Tax (norm)

(2,053)

(2,593)

(1,013)

132

Profit After Tax (FRS 3)

(3,480)

(4,011)

(1,607)

132

Average Number of Shares Outstanding (m)

10.7

13.4

26.8

37.0

EPS - normalised (c)

(19.3)

(19.3)

(3.8)

0.4

EPS - FRS 3 (c)

(32.7)

(29.9)

(6.0)

(1.2)

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

N/A

N/A

N/A

N/A

EBITDA Margin (%)

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

8,419

8,594

30,675

30,917

Intangible Assets

1,678

1,826

3,782

4,038

Tangible Assets

169

270

395

381

Other

6,572

6,498

26,498

26,498

Current Assets

4,118

5,440

5,880

5,920

Stocks

19

100

200

322

Debtors

37

206

400

1,150

Cash

3,764

4,557

4,703

3,871

Other

298

577

577

577

Current Liabilities

(1,305)

(1,707)

(1,785)

(1,885)

Creditors

(316)

(322)

(400)

(500)

Current loans

0

0

0

0

Other

(989)

(1,185)

(1,185)

(1,185)

Long Term Liabilities

(2,890)

(1,913)

(1,713)

(1,513)

Shareholder and other loans

(2,890)

(1,913)

(1,713)

(1,513)

Soft loans

0

0

0

0

Other long term liabilities

0

0

0

0

Net Assets

8,342

10,413

33,057

33,439

CASH FLOW

Operating Cash Flow

(3,495)

(3,638)

(1,148)

5

Net Interest

(84)

(177)

(30)

0

Tax

0

0

0

0

Capex

(621)

(582)

(776)

(637)

Acquisitions/disposals

0

0

(1,700)

0

Financing net of costs, inc debt conversion

5,923

6,067

5,000

0

Dividends

0

0

0

0

Other

(155)

(877)

(1,950)

(200)

Net Cash Flow

1,568

793

(604)

(832)

Opening net debt/(cash)

608

(874)

(2,644)

(2,990)

HP finance leases initiated

0

0

0

0

Other

(86)

977

950

200

Closing net debt/(cash)

(874)

(2,644)

(2,990)

(2,358)

Source: Edison Investment Research, Sygnis. Note: We assume the acquisition of Expedeon will complete by 1 July 2016 and have included €500k in cash from Expedeon.

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YPB Group — Update 19 May 2016

YPB Group

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