Cube UK Report (8 Feb 2021) – Omega benefits from UK govt shopping local

Cube UK Report (8 Feb 2021) – Omega benefits from UK govt shopping local

Morning folks,

Let’s quickly review the headlines:

  • Boohoo
  • Electrocomponents
  • Omega Diagnostics
  • LoopUp
  • UP Global Sourcing

Finished at 3pm.


Boohoo

  • Stock data should display here.
Market cap £4.4 billion
RNS Acquisition of Dorothy Perkins, Wallis & Burton
Writer disclosure No position.

An important day in fashion retail as Sir Philip Green’s Arcadia loses control of Dorothy Perkins, Burton and Wallis brands.

They are being picked up for £25 million in cash from Arcadia’s administrators.

Rationale

  • “grow Boohoo’s market share across a broader demographic”
  • “strengthen Boohoo’s menswear proposition”
  • “additional own label brands to support the Group’s new Debenhams marketplace”

Financial Information

“…the Group expects to incur one-off transaction and restructuring costs in the region of £10 million to £15 million…”

“In the most recent financial year to 29 August 2020, the Brands generated unaudited revenues of approximately £427.8 million across all channels and an unaudited EBITDA loss of £14.3 million. The ongoing businesses for the Brands generated unaudited revenues of approximately £178.8 million over the same period.

My view

Boohoo’s 2021 revenue forecast is currently £1.7 billion, which I think is pre the acquisition of these brands.

So a simple way that I might look at this deal is as follows: we get an approx 10% revenue boost, for an investment of only £40 million (purchase price plus transaction and restructuring costs). That price is less than 1% of Boohoo’s market cap, and only a small fraction of its cash pile.

And this revenue boost – from the “ongoing businesses” of the brands being acquired – significantly diversifies the brands and customers Boohoo serves.

The downside looks fairly limited t0 me – £40 million in cash, plus management time and attention.

The upside, if it works, could be huge – making Boohoo an entity trusted by vast swathes of the online fashion consumer.

It definitely gets the seal of approval from me, though I’m not a shareholder. Perhaps I should be!

 


Electrocomponents

  • Stock data should display here.
Market cap £4.4 billion
RNS Trading Statement
Writer disclosure No position.

This is a huge distributor of electronic products. It doesn’t attract all that much comment, but it’s a good company that I try to keep on my radar.

It appears to have turned the corner in terms of getting a revenue improvement over the past four months, after a difficult period since last March. You could have doubled your money in this stock, if you’d bought at the lows last March:

Key points:

  • full-year profit expectations unchanged.
  • higher revenue growth offset by higher costs.
  • cost impacts: freight, Covid-related labour costs, Brexit-related business continuity.
  • acquisitions performing well

My view

Electrocomponents doesn’t cause a fuss. It’s just a solid, high-quality business in my eyes. Not sure if I’ll ever own it, but will keep it on the watchlist.

 


Omega Diagnostics

  • Stock data should display here.
Market cap £166 million
RNS Statement re: media comment
Writer disclosure No position.

I don’t usually cover the Covid-related stocks. But this one caught my eye, its shares being up 33% this morning.

A very short RNS:

Omega (AIM: ODX), the medical diagnostics company focused on CD4, infectious diseases and food intolerance, notes the article published online yesterday by the Financial Times.

The Company can confirm that it is continuing to modify its Alva-based facility to upscale significantly its lateral flow test production capacity. When contracts or supply agreements are signed to utilise this capacity the Company will announce this in line with AIM disclosure obligations.

The FT article in question is this one:

The key reveal in the article is:

The Department of Health has chosen Omega Diagnostics, SureScreen and Global Access Diagnostics to produce up to 2m lateral flow devices (LFDs) per day for the UK, according to two people briefed on the decision.

And some important context from the article:

The government, which has doubled down on its rollout of LFDs in spite of the debate, has been almost entirely reliant on limited supplies from the US and China and is desperate to scale up domestic production.  According to publicly available contracts, it has spent at least £1.5bn on the tests — and last month closed a tender worth a further £912m. The bulk of the spending has gone to US company Innova, which has received £1bn in contracts to procure hundreds of millions of devices which are manufactured in China. 

My view

My general views on Covid-19 are well-known at this point.

When it comes to testing for Sars-Cov-2, I’m happy to accept almost any alternative to PCR tests at 40-45 cycles, which I understand to be clinically meaningless. I’m not a doctor, but that is my view based on the fact that 1) they will test positive if they find a single viral particle, and 2) they cannot distinguish between dead virus and live virus.

I would therefore be delighted to see PCR tests in their current form abandoned. Rapid antigen tests are a good alternative.

This forthcoming government contracts will hopefully flow through to significant revenues and profits for Omega.

However, I’m going to struggle to quantify the opportunity.

For example, let’s suppose the government has spent £1.5 billion so far, and will spend that amount again. But it will spend it in the UK.

If that spending was divided equally among the three UK manufacturers, that would be £500 million each.

What would the margin on such sales be?

Again, there appears to be a wide possible margin. Gross margin at the interim results was 42.9%, down from 67.5% the year before.

I just don’t have enough information to be able to put a value on Omega at this stage. The £166 million market cap doesn’t seem ludicrous, if you’re willing to make certain assumptions. But I really don’t know how likely it is that these assumptions are reasonable.

 


LoopUp

Trading Update

A brief update:

In line with the trading statement of 27 November 2020, the Group can now confirm that it expects revenue for year ended 31 December 2020 to be approximately £50.2 million (FY2019: £42.5 million) and EBITDA to be approximately £15.3 million (FY2019: £6.4 million).

The Group ended the year with gross cash of £12.1 million (FY2019: £3.0 million) and net debt of £0.7 million (FY2019: £11.5 million).

Given a market cap of just £43 million, these numbers are impressive.

The company doesn’t have a great track record of converting revenues into real profits yet. Maybe this year?

 


UP Global Sourcing

Trading Update

Another solid update.

This is for H1:

  • revenues +11.4%
  • homeware sales strong, with the online and supermarket channels outperforming
  • net bank debt £1.5 million (£3.8 million six months previously)

Outlook

FY July 2021 to be ahead of current expectations. Revenues to be £135 million (vs. recent consensus forecast: £131.4 million).

While the Group is currently seeing an increase in shipping rates ahead of the start of the Chinese New Year on 12 February (in common with all businesses that source product from China), the Board nevertheless currently expects that underlying EBITDA for FY21 will be in excess of £12.6m (FY20: £10.4m) with underlying PBT in excess of £10.3m (FY20: £8.2m).

My view

It’s really a very nice update.

Given the nature of its activities – importing cheap goods from China – I’d be slow to award this a  very high rating.

The market seems to agree with that, given the £114 million market cap.

 


 

That’s it for today’s report. See you tomorrow!

Graham

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COMMENTS

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  • comment-avatar

    I was interested in your comment on PCR testing which flies in the face of everything I have read to date. I understood that PCR was the ‘gold standard’ test and that the one and only disadvantage was the time factor which is anyway being reduced with newer products and equipment. I also understand that PCR can be a basis for identifying mutations. Frabkly I also thought that lateral testing was inaccurate and that its only real advantage was speed – and thus it is being lined up for regular school testing. I have looked at the DHSC tender/bid website a bit and been struck by the apparent domination of this space by US affiliates though I realise a number of UK companies, some privately owned, are also in this business. It is a tough area for a non-specialist to begin to understand – production ability, pricing, competition, effectiveness are often far from clear – but it does look as if, very sadly I now, testing will be with us for longer. Diagnostics certainly will and has received a huge boost from this ghastly virus.

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    • comment-avatar

      Hey Wombat, PCR is considered a “gold standard” because of its extremely high specificity (few false positives) and quite high sensitivity (few false negatives).

      However, it has the two issues I mention in this article, and for this reason I consider the “case” numbers it generates to be meaningless. I acknowledge there’s a lot of controversy around this topic, and people will disagree with me on that!

      Lateral flow tests do miss some positive cases, but they are very fast and cheap and crucially they are helpful for finding people who are in fact sick and infectious.

      There will be a big bonanza in this space but quantifying the outcomes for specific companies looks extremely difficult to me. Good luck to anyone involved.

      Best,

      Graham

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