Small Cap Value Report (Mon 15 Feb 2021) - ONC, EBQ

Good morning, it's Jack & Paul here with the SCVR for Monday.

---

Jack's section

Oncoimmune Holdings (LON:ONC)

Share price: 177.08p (+2.65%)

Shares in issue: 63,662,446

Market cap: £112.7m

Oncimmune Holdings (LON:ONC) provides two main services in the biopharma space. It is 1) a developer of applied immunodiagnostics for the early detection of disease, and 2) involved in drug discovery and development.

Its ‘proprietary platform technology includes a substantial immunogenic protein library, over 200 patents granted and pending in 47 countries and over 150 peer-reviewed materials,’ apparently.

The group’s HQ is in Nottingham, and it also has a discovery research centre in Dortmund, Germany, as well as a partner representative office in Shanghai, China.

ONC is focused on improving cancer survival and has a diversified and growing revenue from its portfolio of diagnostic products. Meanwhile, its ImmunoINSIGHTS platform enables life-science organisations to optimise drug development and delivery. ​

Oncimmune's immunodiagnostic technology, EarlyCDT, ‘can detect and help identify cancer on average four years earlier than standard clinical diagnosis.’ This targets a vast market estimated to grow to £3.8bn by 2024.

Although revenue is growing, it is still tiny compared to the group’s market cap of £112.7m with just £509,000 of sales in FY20. So the market is already pricing in a lot of growth at these levels.

The group continues to burn through cash as well, having raised funds from equity in 2013, 2016, and 2018, as well as taking on debt in 2014, 2015, 2016, and 2020. So becoming self-funding is surely the first step with Oncoimmune and it’s possible that the events of the past year have brought this goal forward.

Interim results

Indeed, ONC opens with:

Substantial revenue growth achieved with increased commercial activity across the business...

Growing pipeline of ImmunoINSIGHTS contracts in negotiation with large pharmaceutical companies and biotechs.

But you have to scroll down a fair bit to get to the actual trading figures. Financial highlights include:

• Revenue for the period was up sixfold to £1.83m (H1 2019: £0.31m).
• Gross profit for the period was £1.41m (H1 2019: gross loss £0.05m).
• Total administrative expenses were £2.88m (H1 2019: (Restated) £4.88m).
• Research & Development costs were £0.62m (H1 2019: £1.01m)
• Loss after tax was £2.60m (H1 2019: (Restated) £5.27m).
• Investment in the ImmunoINSIGHTS business with additional equipment purchases and headcount to further increase capacity and remove possible operational bottlenecks.
• Gross cash balance at the period end of £3.28m (FY 2020: £4.24m) and gross debt at the period end of £9.59m (FY 2020: £7.29m).

So, for now, let’s assume the H1 performance is repeated in H2 and ONC generates FY21 revenue of £3.66m. That’s still a valuation of nearly 30x FY21 sales. Whatever the optimistic tone in the narrative, coming back to this basic point on valuation should probably keep our feet on the ground.

That aside, a gross margin of 77% suggests potential and trading does sound good here, with a ‘marked increase in commercial activity’ for its ImmunoINSIGHTS services. Seven contracts were signed in the period, including with Roche Pharmaceuticals and Genentech and a pipeline of over 100 opportunities.

ONC’s Infectious diseases (COVID-19) business has received funding Services from the UK Government to support a joint collaboration with Medicines Discovery Catapult to deliver a research panel for profiling patients with COVID-19.

There’s a subsequent partnership with Cedars-Sinai Medical Center, California, US, signed to analyse COVID-19 samples as biomarkers for this disease, with ‘several global biopharmaceutical companies’ also looking to access this Infectious Diseases panel.

The group’s EarlyCDT® Lung product has seen the first commercial contracts signed to supply EarlyCDT® Lung blood test to the NHS. Sales volumes and forecasts in the US have ‘materially improved’ here, with an expected increase in commercial activity in 2021 and beyond.

On a more general note regarding its lung cancer products and services, ONC expects product sales to at least return to pre-pandemic forecasts as national hospitals open up.

Conclusion

Of that pipeline of over 100 opportunities, 19 are potential contracts with a value of £10.8m from follow-on contracts with existing customers or proposals for new customers. In which case, it’s probably reasonable to assume good top line growth over the next year or two.

But this company also has a history of cash burn and raising funds from debt and equity, so understanding exactly why a corner has been turned in this regard is important. I don’t have that insight yet. What’s more, the ONC valuation doesn’t just factor in becoming self-funding - it prices in substantial revenue growth.

The company does seem to be expanding quickly though. It’s on an exciting trajectory and is successfully establishing partnerships with the NHS, as well as leading pharmaceutical and biotech companies. Meanwhile, the ImmunoINSIGHTS business is underpinned by world leading technologies and expertise which, despite the impact of COVID-19, has delivered significant commercial opportunities.

So it’s certainly worth spending some time considering the prospects here, but there is just the valuation to consider. For those convinced that ONC is on its way to becoming something much larger, perhaps it is worth paying that premium.

But for now, with limited knowledge of the company, that wide gulf between market cap and trading results rules it out for me. There is a presentation later today on https://www.investormeetcompany.com/ if anybody wants to hear from management.

.

---

Paul’s Section

I checked the RNS first thing, and unusually found absolutely nothing of interest. So I’ve been having a lazy day, counting my profits, as the portfolio seems to be reaching new highs on a daily basis at the moment. We’re all geniuses in a bull market, aren’t we! I’ve no idea how long this can continue, but let’s enjoy it while it lasts.

Anyway, guilt has kicked in, so thought I’d better produce something for readers.

Ebiquity (LON:EBQ)

21.4p (up 12% at 15:51) - mkt cap £16.8m

The price is up 12%, so that’s a good start, there might be something interesting here. Checking back through the archive, I last reported on it here on 19 Feb 2020, and thought it looked cheap at 31.5p, but was unimpressed with the company’s long & undistinguished financial track record as a listed company. It’s down by a third since then, having completely missed the “dash for trash” rally that we’ve seen in vaccines came in last autumn, that has floated most boats. Not this one though. Could that be a buying opportunity I wonder?

Trading update today

Ebiquity plc ("Ebiquity" or the "Group"), a leading independent marketing and media consultancy, announces a pre-close trading update for the financial year ended 31 December 2020, ahead of the preliminary results announcement planned for 25 March 2021.

• Trading was in line with the Board’s expectations - a small adjusted operating loss
• H2 revenue up on H1, and profitable in H2
• Recovery in demand
• Net debt of £7.7m also in line with expectations
• Encouraging start to 2021

Two questions jump out at me, namely (1) is there a risk of breaching banking covenants, since it’s only operating just below breakeven? And (2) check out the balance sheet, as the company claims to be strong, which is often a flag that it’s not strong!

Interim results - to 30 June 2020, for background. Bad, as I would expect, since this period was when covid first hit. Revenues down 26% to £26.8m. Underlying loss before tax of £(1.9)m.

Balance sheet - well it’s not strong, as I suspected. Intangibles assets total £36.0m, so if we take that off NAV of £33.9m, then NTAV becomes negative, at £(2.1)m. A negative NTAV by definition, is not a strong balance sheet. The group has been hoarding cash, but that’s more than offset with bank borrowings.

Going concern note in the interim results indicates that previous bank covenants have been replaced with a monthly liquidity test. There is 18% headroom on this covenant, from management’s base case. But it concludes with a “material uncertainty” about going concern, which makes this share potentially high risk.

Given that business, and the economy generally, seem to be on an improving trend, then this might not be a major concern. However I think it does raise the risk of an equity fundraising being needed, and bank facilities possibly being reduced, if the bank gets jittery at any stage.

It is remarkable how flexible & supportive banks have been towards many listed businesses in the last year. Combined with Government support on an unprecedented scale (funded entirely by £450bn in money printing last year), this has really been a huge financial experiment, never seen before. It shouldn’t work, but it does seem to be working, for now anyway.

My opinion - the trouble with this share, is that its long-term track record is poor. So we can’t just assume it will return to good performance once the world has recovered from covid. It talks about being a leading marketing agency, but where are the profits, where are the divis?

I see from the major shareholder list, that it’s mainly owned by city institutions. With this type of business, I would want to see owner/managers, properly motivated to successfully grow the business & pay decent divis.

It’s difficult to avoid the conclusion that this group is run for the benefit of its staff and Directors, not for shareholders. Something fundamental would need to change, to convince me that this share has much upside potential.

.

.

---